**UNITED
        STATES**
 **SECURITIES
        AND EXCHANGE COMMISSION**
 
 **Washington,
        D.C. 20549**
 
 **FORM
        10-Q**
 
 **ý**
              
              **QUARTERLY
                  REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
                  EXCHANGE ACT
                  OF 1934****FOR
                  THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2005****o**
              
              **TRANSITION
                  REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
                  AND EXCHANGE
                  ACT OF 1934**
 
  **Commission
        file number 000-04169**
 
 **SYS**
 (Exact
        name of Registrant as specified in its charter)
  **California**
              
              **95-2467354**(State
                  or other jurisdiction of
                incorporation
                  or organization)
              
              (I.R.S.
                  Employer
                Identification
                  No.)
 
  **5050
                  Murphy Canyon Road, Suite 200, San Diego, California
                  92123**
 **(858)
        715-5500**
 (Address,
        including zip code, and telephone number, including
 area
        code, of Registrant’s principal executive offices)
 
 Indicate
        by check mark whether the registrant: (1) has filed all reports required
        to be
        filed by Section 13 or 15(d) of the Securities Exchange Act of 1934
        during
        the preceding 12 months (or for such shorter period that the registrant was
        required to file such reports), and (2) has been subject to such filing
        requirements for the past 90 days. Yes ý No o
  Indicate
        by check mark whether the Registrant is an accelerated filer (as defined
        in
        Exchange Act Rule 12b-2) Yes o No ý
  As
        of
        November 7, 2005 there were 11,348,933 shares of the registrant’s common stock
        outstanding.
  
 
  
 **SYS**
  **FORM
        10-Q**
  **FOR
        THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2005**
  **INDEX**
  **PART
                I. FINANCIAL INFORMATION**Item
                  1.
              
              Financial
                  StatementsCondensedConsolidated
                  Balance
                  Sheets at June 30, 2005 and September 30, 2005
                  (unaudited)CondensedConsolidated
                  Statements
                  of Operations
                  for the Three Months Ended September 30, 2005 and September
                  24, 2004
                  (unaudited)CondensedConsolidated
                  Statements of Cash Flows
                  for the Three Months Ended September  30, 2005 and September
                  24, 2004
                  (unaudited)Notes
                  to Condensed Consolidated Financial Statements (unaudited)Item
                  2.
              
              Management’s
                  Discussion and Analysis of Financial Condition and Results of
                  OperationsItem
                  3.
              
              Quantitative
                  and Qualitative Disclosures About Market RiskItem
                  4.
              
              Controls
                  and Procedures**PART
                  II. OTHER INFORMATION**Item
                  1.
              
              Legal
                  ProceedingsItem
                  2.
              
              Unregistered
                  Sales of Equity Securities and Use of ProceedsItem
                  3.
              
              Defaults
                  Upon Senior SecuritiesItem
                  4.
              
              Submission
                  of Matters to a Vote of Security HoldersItem
                  5.
              
              Other
                  InformationItem
                  6.
              
              ExhibitsSignaturesExhibit
                  31.1Exhibit
                  31.2Exhibit
                  32.1Exhibit
                  32.2
 
  
 **PART
        I. FINANCIAL INFORMATION**
 **Item
        1. Financial Statements**
 
 SYS
                  AND SUBSIDIARIES
                CONDENSED
                  CONSOLIDATED BALANCE SHEETSSeptember
                  30,
              
              
              June
                  30,2005
              
              
              2005(Unaudited)ASSETSCurrent
                  AssetsCash
              
              $
              3,266,000
              
              $
              3,485,000Accounts
                  receivable, net
              
              
              11,478,000
              
              
              10,992,000Inventory
              
              
              95,000
              
              
              97,000Prepaid
                  expenses
              
              
              254,000
              
              
              166,000Total
                  current assets
              
              
              15,093,000
              
              
              14,740,000Furniture,
                  equipment and leasehold improvements, net of accumulated depreciation
                  and
                  amortization of $1,538,000 and $1,428,000
              
              
              1,346,000
              
              
              1,169,000Capitalized
                  software, net of accumulated amortization of $63,000 and
                  $58,000
              
              
              39,000
              
              
              44,000Intangible
                  assets, net of accumulated amortization of $394,000 and
                  $315,000
              
              
              1,440,000
              
              
              1,188,000Goodwill
              
              
              7,893,000
              
              
              7,309,000Other
                  assets
              
              
              219,000
              
              
              305,000Total
                  assets
              
              $
              26,030,000
              
              $
              24,755,000LIABILITIES
                  AND STOCKHOLDERS’ EQUITYCurrent
                  Liabilities:Accounts
                  payable
              
              $
              982,000
              
              $
              1,216,000Accrued
                  payroll and related expenses
              
              
              1,953,000
              
              
              2,954,000Income
                  taxes payable
              
              
              345,000
              
              
              138,000Other
                  accrued liabilities
              
              
              1,323,000
              
              
              1,058,000Current
                  portion of deferred tax liabilities
              
              
              562,000
              
              
              562,000Current
                  portion of convertible notes payable, related party
              
              
              388,000
              
              
              388,000Current
                  portion of convertible notes payable
              
              
              244,000
              
              
              319,000Deferred
                  revenue
              
              
              28,000
              
              
              54,000Total
                  current liabilities
              
              
              5,825,000
              
              
              6,689,000Convertible
                  notes payable, net of current portion, related party
              
              
              977,000
              
              
              973,000Convertible
                  notes payable, net of current portion
              
              
              1,430,000
              
              
              1,436,000Other
                  liabilities
              
              
              4,000
              
              
              4,000Deferred
                  tax liabilities
              
              
              249,000
              
              
              249,000Total
                  liabilities
              
              
              8,485,000
              
              
              9,351,000COMMITMENTS
                  AND CONTINGENCIESSTOCKHOLDERS’
                  EQUITY:4%
                  convertible preferred stock, $.50 par value; 250,000
                  sharesauthorized,
                  none issued or outstanding
              
              
              --
              
              
              --9%
                  preferred stock, $1.00 par value; 2,000,000 sharesauthorized,
                  none issued or outstanding
              
              
              --
              
              
              --Common
                  stock, no par value; 48,000,000 shares authorized;11,154,689
                  and 10,623,049 shares issued and outstandingas
                  of September 30, 2005 and June 30, 2005, respectively
              
              
              14,458,000
              
              
              12,792,000Retained
                  earnings
              
              
              3,087,000
              
              
              2,612,000Total
                  stockholders’ equity
              
              
              17,545,000
              
              
              15,404,000Total
                  liabilities and stockholders’ equity
              
              $
              26,030,000
              
              $
              24,755,000
 
 See
        accompanying notes to unaudited condensed consolidated financial
        statements.
 
 SYS
                  AND SUBSIDIARIES
                CONDENSED
                  CONSOLIDATED STATEMENTS OF OPERATIONS
                THREE
                  MONTHS ENDED SEPTEMBER 30, 2005 AND SEPTEMBER 24, 2004
                (Unaudited)2005
              
              
              2004Revenues
              
              $
              13,094,000
              
              $
              11,107,000Operating
                  costs and expenses:Contract
                  costs
              
              
              10,235,000
              
              
              9,506,000Selling,
                  general and administrative expenses
              
              
              1,978,000
              
              
              987,000Total
                  operating costs and expenses
              
              
              12,213,000
              
              
              10,493,000Income
                  from operations
              
              
              881,000
              
              
              614,000Other
                  (income) expense:Other
                  income
              
              
              (36,000
              )
              
              --Interest
                  expense
              
              
              99,000
              
              
              114,000Total
                  other (income) expense
              
              
              63,000
              
              
              114,000Income
                  before income taxes
              
              
              818,000
              
              
              500,000Income
                  tax provision
              
              
              343,000
              
              
              196,000Net
                  income
              
              $
              475,000
              
              $
              304,000Net
                  income per share:Basic
              
              $
              0.04
              
              $
              0.04Diluted
              
              $
              0.04
              
              $
              0.03Weighted
                  average shares:Basic
              
              
              10,880,466
              
              
              8,153,516Diluted
              
              
              13,656,847
              
              
              10,964,966
  See
        accompanying notes to unaudited condensed consolidated financial
        statements.
  
  SYS
                  AND SUBSIDIARIES
                CONDENSED
                  CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
                THREE
                  MONTHS ENDED SEPTEMBER 30, 2005 AND SEPTEMBER 24,
                  20042005
              
              
              2004Cash
                  Flows from Operating Activities:Net
                  income
              
              $
              475,000
              
              $
              304,000Adjustments
                  to reconcile net income to cash used in operating
                  activities:Depreciation
                  and amortization
              
              
              202,000
              
              
              117,000Share-based
                  compensation expense
              
              
              156,000
              
              
              --Share-based
                  compensation expense - Polexis acquisition
              
              
              --
              
              
              67,000Straight-line
                  rent adjustment
              
              
              3,000
              
              
              41,000Accretion
                  of debt discount
              
              
              11,000
              
              
              11,000Gain
                  on disposition of equipment
              
              
              --
              
              
              (8,000
              )Stock
                  contributed to employee benefit plan
              
              
              279,000
              
              
              --Changes
                  in operating assets and liabilities:Accounts
                  receivable
              
              
              (472,000
              )
              
              (3,796,000
              )Inventories
              
              
              2,000
              
              
              --Prepaid
                  expenses
              
              
              (88,000
              )
              
              49,000Accounts
                  payable
              
              
              (234,000
              )
              
              924,000Accrued
                  payroll and related taxes
              
              
              (1,001,000
              )
              
              (246,000
              )Income
                  taxes payable
              
              
              207,000
              
              
              193,000Other
                  accrued liabilities
              
              
              (110,000
              )
              
              (211,000
              )Deferred
                  revenue
              
              
              (26,000
              )
              
              --Net
                  cash used in operating activities
              
              
              (596,000
              )
              
              (2,555,000
              )Cash
                  Flows from Investing Activities:Purchases
                  of furniture, equipment and leasehold improvements
              
              
              (187,000
              )
              
              (70,000
              )Cash
                  paid for acquisitions
              
              
              (215,000
              )
              
              (73,000
              )Proceeds
                  from investment
              
              
              90,000
              
              
              --Other
              
              
              (13,000
              )
              
              (14,000
              )Net
                  cash used in investing activities
              
              
              (325,000
              )
              
              (157,000
              )Cash
                  Flows from Financing Activities:Net
                  line of credit borrowings
              
              
              --
              
              
              645,000Payments
                  of notes payable and other borrowings
              
              
              --
              
              
              (28,000
              )Payments
                  on capital lease obligations
              
              
              --
              
              
              (8,000
              )Debt
                  issuance costs
              
              
              --
              
              
              (30,000
              )Withholdings
                  related to employee stock purchase plan
              
              
              123,000
              
              
              --Issuance
                  of stock to participants of employee stock purchase plan
              
              
              196,000
              
              
              59,000Proceeds
                  from exercise of stock options and warrants
              
              
              413,000
              
              
              --Registration
                  costs
              
              
              (30,000
              )
              
              (18,000
              )Net
                  cash provided by financing activities
              
              
              702,000
              
              
              620,000Net
                  decrease in cash
              
              
              (219,000
              )
              
              (2,092,000
              )Cash
                  at beginning of year
              
              
              3,485,000
              
              
              2,159,000Cash
                  at end of year
              
              $
              3,266,000
              
              $
              67,000
 
 See
        accompanying notes to unaudited condensed consolidated financial
        statements.
 
  SYS
                  AND SUBSIDIARIES
                CONDENSED
                  CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) (Continued)
                THREE
                  MONTHS ENDED SEPTEMBER 30, 2005 AND SEPTEMBER 24,
                  20042005
              
              
              2004Supplemental
                  disclosure of cash flow information:Interest
                  paid
              
              $
              94,000
              
              $
              94,000Income
                  taxes paid
              
              $
              136,000
              
              $
              4,000Supplemental
                  disclosure of noncash investing and financing activities:Acquisitions:Fair
                  value of assets acquired
              
              $
              1,028,000
              
              $
              (14,000
              )Less
                  other liabilities
              
              
              (372,000
              )
              
              87,000Less
                  value of warrants issued
              
              
              (65,000
              )
              
              --Less
                  common stock issued
              
              
              (376,000
              )
              
              --Cash
                  paid
              
              $
              215,000
              
              $
              73,000Common
                  stock issued on conversion of notes payable
              
              $
              88,000
              
              $
              --
 
 See
        accompanying notes to unaudited condensed consolidated financial
        statements.
 
  
 **SYS
        AND SUBSIDIARIES**
 **NOTES
        TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**
 **(Unaudited)**
  **1.
        Basis of Financial Statement Preparation and Significant Accounting
        Policies:**
 
 The
        accompanying condensed consolidated financial information of SYS and its
        subsidiaries (SYS or the Company) should be read in conjunction with the
        Notes
        to Consolidated Financial Statements contained in our Annual Report on
        Form 10-KSB to the Securities and Exchange Commission (SEC) for the
        year
        ended June 30, 2005. The accompanying financial information includes
        all
        subsidiaries on a consolidated basis and all normal recurring adjustments
        which
        are considered necessary by the Company's management for a fair presentation
        of
        the financial position, results of operations and cash flows for the periods
        presented. However, these results are not necessarily indicative of results
        for
        a full fiscal year. Additionally, certain prior period amounts have been
        reclassified to conform to the current period presentation. Substantially
        all of
        the Company’s operations are conducted in the United States.
 
 The
        Company’s fiscal year is from July 1 through June 30.  The
        Company uses the 5-4-4 weeks per period method for each quarter; periods
        one
        (July) and twelve (June) may vary slightly in the actual number of days due
        to
        the beginning and end of each fiscal year.
 
 **Use
        of Estimates:**
  The
        preparation of financial statements in conformity with Generally Accepted
        Accounting Principles in the United States (US GAAP) requires management
        to make
        estimates and assumptions that affect the reported amounts of assets and
        liabilities, the disclosure of contingent assets and liabilities at the date
        of
        the financial statements and the reported amounts of revenues and expenses
        during the reporting period. In the future, the Company may realize actual
        results that differ from the current reported estimates.  The Company’s
        significant estimates include those related to revenues and customer billings,
        recovery of indirect costs, allowance for doubtful accounts, valuation of
        long-lived assets including identifiable intangibles and goodwill, accounting
        for income taxes including the related valuation allowance, contingencies,
        and
        share-based compensation.
 
 **New
        Accounting Standards:**
 
 In
        June
        2005, the FASB issued SFAS No. 154, Accounting Changes and Error Corrections
        (SFAS 154æ). SFAS 154 replaces APBO No. 20 (APBO 20æ) and SFAS No. 3, Reporting
        Accounting Changes in Interim Financial Statements, and applies to all voluntary
        changes in accounting principle, and changes the requirements for accounting
        for
        and reporting of a change in accounting principle. APBO 20 previously required
        that most voluntary changes in accounting principle be recognized by including
        in net income of the period of change a cumulative effect of changing to
        the new
        accounting principle whereas SFAS 154 requires retrospective application
        to
        prior periods’ financial statements of a voluntary change in accounting
        principle, unless it is impracticable. SFAS 154 enhances the consistency
        of
        financial information between periods. The Company early adopted SFAS 154
        in its
        first quarter of fiscal year 2006. The adoption of SFAS 154 did not have
        a
        material impact on the Company’s results of operations or financial
        position.
 
 In
        November 2004, the FASB issued SFAS No.
        151,
        "Inventory Costs" ("SFAS 151"), an amendment of ARB No. 43, Chapter 4. SFAS
        151
        clarifies the accounting for abnormal amounts of idle facility expense, freight,
        handling costs and wasted material. SFAS 151 is effective for inventory costs
        incurred during fiscal years beginning after June 15, 2005. The Company does
        not
        believe adoption of SFAS will have a material effect on its financial position,
        results of operations or cash flows.
 
 **2.
        Share-based Compensation:**
 
 The
        Company has stock plans that provide for the grant to employees of stock
        options, permit the grant of non-statutory share-based awards to paid
        consultants, and provide for the automatic grant of non-statutory share-based
        awards to outside directors. The plans may have options with
        terms of no more than ten years. The maximum terms of the options granted
        under
        these plans have been seven years with a maximum vesting of five years. The
        Company also has an employee stock purchase plan (ESPP) for employees to
        purchase its common stock at a discount. The ESPP provides for enrollment
        on the
        first day of a six-month period in which the employees can elect payroll
        deductions for the purchase of the Company's common stock. The exercise date
        of
        the ESPP shall be the last day of the six month period and the purchase price
        shall be 85% of the fair market value of a share of common stock on the
        enrollment or exercise date, whichever is lower.
 
 Prior
        to
        July 1, 2005, the Company accounted for its stock plans under the
        provisions of Accounting Principles Board Opinion No. 25, Accounting
        for
        Stock Issued to Employees (APB No. 25) and FASB Interpretation
        (FIN) No. 44, Accounting for Certain Transactions Involving
        Stock
        Compensation — an Interpretation of APB Opinion No. 25æ (FIN No. 44) and
        made
        pro forma footnote disclosures as required by Statement of Financial Accounting
        Standards (SFAS) No. 148, Accounting For Stock-Based Compensation - Transition
        and Disclosure, which amends SFAS No. 123, Accounting For Stock-Based
        Compensation .
        The
        Company adopted Statement of Financial Accounting Standards No. 123
        (revised 2004), Share-Based Payment (SFAS No. 123R), effective July 1, 2005
        using the modified-prospective-transition method. Accordingly, prior period
        amounts have not been restated. Under this transition method, share-based
        compensation expense recognized during the quarter ended September 30, 2005
        includes stock options granted prior to, but not yet vested as of July 1,
        2005, based on the grant-date fair value estimated in accordance with the
        original provisions of SFAS No. 123 and the following items based
        on the
        grant date values estimated in accordance with the provisions of SFAS No.
        123R:
        (a) stock options granted after June 30, 2005, (b) ESPP with offering periods
        commencing subsequent to June 30, 2005, (c) a stock purchase agreement
        issued to an employee that provides for the purchase of the Company’s stock at a
        discount and (d) stock issued to employees of the Company.
 
 The
        Company recognized share-based compensation expense of $156,000 during the
        quarter ended September 30, 2005, which consisted of $30,000 related to employee
        stock options, $38,000 related to the employee stock purchase plan, $37,000
        related to an employee stock purchase agreement and $51,000 related to shares
        of
        the Company’s stock issued to employees in connection with the acquisition of
        Antin. The income tax benefit recognized related to the share-based compensation
        expense was $37,000. The estimated fair value of the Company’s share-based
        awards, less expected forfeitures, is amortized over the awards’ vesting period
        on a straight-line basis for awards granted after the adoption of SFAS No.
        123R
        and on a graded-vesting basis for awards granted prior to the adoption of
        SFAS
        No. 123R.
 
 On
        June
        29, 2005, the Board of Directors of SYS approved the acceleration of the
        vesting
        of all outstanding unvested stock options (the Acceleration). The Acceleration
        was effective for all such options outstanding on June 30, 2005, all of which
        were granted by the Company when the accounting rules permitted use of the
        intrinsic-value method of accounting for stock options. All of the other
        terms
        and conditions applicable to such outstanding stock option grants still apply.
        Under APB No. 25, the Acceleration resulted in recognition of share-based
        compensation expense of $51,000 which was determined by measuring the intrinsic
        value on the date of the modification of the options that otherwise would
        have
        expired unexercised. The Company's decision to accelerate the vesting of
        these
        options was in anticipation of compensation expense to be recorded in connection
        with outstanding unvested stock options issued to employees subsequent to
        the
        effective date of SFAS No. 123R issued in December 2004. As a result of the
        Acceleration, options to purchase 785,642 shares of the Company's common
        stock
        became immediately exercisable. If these options had not been accelerated,
        share-based compensation expense totaling $47,000 would have been recognized
        in
        the three months ended September 30, 2005 and a balance of $531,000 would
        have
        been recognized over a weighted average remaining vesting period of
        approximately 3.6 years. Holders of incentive stock options to purchase 246,800
        shares of common stock elected to decline the acceleration of their options
        because the acceleration would have the effect of changing the status of
        such
        options for federal income tax purposes from an incentive stock option to
        a
        non-qualified stock option.
 
 The
        modified prospective transition method of SFAS No. 123R requires the
        presentation of pro forma information, for periods presented prior to the
        adoption of SFAS No. 123R, regarding net income and net income per
        share as
        if the Company had accounted for its stock plans under the fair value method
        of
        SFAS No. 123R. For pro forma purposes, fair value of stock options
        and ESPP
        awards was estimated using the Black-Scholes option valuation model. The
        fair
        value of all of the Company’s share-based awards was estimated assuming no
        expected dividends and estimates of expected life, volatility and risk-free
        interest rate at the time of grant.
 
  
  The
        following table illustrates the effect on net income and net income per share
        if
        the Company had accounted for its stock plans under the fair value method
        of
        accounting under SFAS No. 123R for the three months ended September
        24,
        2004.
 
 Net
                  income - as reported
              
              $
              304,000Add
                  total share-based employee compensation expense in reported net
                  income,
                  net of related tax effects
              
              
              --Deduct
                  total share-based employee compensation expense determined under
                  fair
                  value based method for all stock option awards, net of tax
              
              
              (75,000
              )Net
                  income - pro forma
              
              $
              229,000Basic
                  income per common share:As
                  reported
              
              $
              0.04Pro
                  forma
              
              $
              0.03Diluted
                  income per common share:As
                  reported
              
              $
              0.03Pro
                  forma
              
              $
              0.03
 
 The
        fair
        value of the Company’s share-based awards granted in the three-month period
        ended September 24, 2004 was estimated using the following weighted-average
        assumptions:
 
 Dividend
                  yield
              0.0%Expected
                  volatility
              49.0%Risk-free
                  interest rate
              3.4%Expected
                  lives
              4.50
 
 The
        maximum terms of the options granted under the Company’s stock option plans have
        been five years with a maximum vesting of four years. At September 30, 2005,
        the
        Company had 1,212,250 shares of common stock available for future grants
        under
        the 2003 Plan.
 
 The
        following table summarizes certain information regarding stock options during
        the three month period ended September 30, 2005:
 
 WeightedWeighted
                
                
                AverageAverage
                
                
                Remaining
                
                
                AggregateExercise
                
                
                Contractual
                
                
                IntrinsicShares
                
                
                Price
                
                
                Term
                    (Yrs)
                
                
                ValueBalance
                    outstanding at beginning of year
                
                
                2,391,100
                
                $
                1.95Granted
                
                
                201,500
                
                $
                3.64Exercised
                
                
                (91,350
                )
                $
                1.73Cancelled
                
                
                (3,150
                )
                $
                1.41Balance
                    outstanding at end of quarter
                
                
                2,498,100
                
                $
                2.09
                
                
                2.93
                
                $
                4,589,000Options
                    exercisable at end of quarter
                
                
                2,106,000
                
                $
                1.93
                
                
                2.71
                
                $
                4,208,000
 The
        total
        intrinsic value of options exercised during the quarter ended September 30,
        2005
        was $201,000. As of September 30, 2005, there was $351,000 of total unrecognized
        compensation cost related to non-vested stock options granted and outstanding;
        that cost is expected to be recognized through fiscal year 2010, with a weighted
        average remaining period of 4.3 years. Cash received from stock option exercises
        was $158,000 during the quarter ended September 30, 2005.
 
 The
        2003
        Employee Stock Purchase Plan (ESPP) allows employees to designate a portion
        of
        their base compensation to be used to purchase the Company’s common stock at a
        purchase price per share at 85% of the lower of the fair market value on
        the
        first or last day of each offering period. Each offering period lasts six
        months. ESPP awards were valued using the Black-Scholes model with an expected
        life of 6 months, expected volatility of 48.37%, a 3.35% risk free interest
        rate
        and no expected dividends. As of September 30, 2005 there was $38,000 of
        unrecognized compensation cost related to the employee stock purchase plan
        with
        an expected remaining life of 90 days.
 
 On
        August
        16, 2005, the Company entered into a restricted stock purchase agreement
        with an
        employee as an inducement to employment. The agreement allowed the employee
        to
        purchase between 200,000 and 250,000 shares of the Company’s common stock by
        November 15, 2005. The purchase price was to be 90 percent of the average
        closing price between the date of the agreement and the purchase date but
        in no
        event less than $2.50 per share. The rights to purchase the shares vested
        one-half on September 30, 2005 and one-half on November 15, 2005. The Company
        valued this agreement using an option pricing model with an expected life
        of
        three months, expected volatility of 48.58%, a 3.52% risk free interest rate
        and
        no expected dividends. As of September 30, 2005 there was $37,000 of
        unrecognized compensation cost related to this stock purchase agreement with
        an
        expected remaining life of 45 days, which will be expensed in the quarter
        ending
        December 30, 2005. If the employee did not specify an exercise date
        and
        number of shares to be purchased by November 7, 2005, then the closing was
        to
        occur on November 7, 2005 for the minimum number of shares. The employee
        did not
        specify either a closing date or a number of shares. As of November 9, 2005
        the
        Company and the employee determined that the employee would not be able to
        exercise his rights or fulfill his obligations within the terms of the
        agreement. As a result, the Company and the employee mutually agreed to,
        and
        executed, a rescission of the restricted stock purchase agreement.
 
 On
        September 12, 2005, SYS’s Board of Directors approved the issuance of an
        additional 25,130 shares of the Company’s common stock to be issued to the Antin
        stockholders, in addition to those shares still being held in escrow, as
        a
        result of a modification of a working capital purchase price adjustment provided
        for in the purchase agreement. One-half of the shares were issued directly
        to
        the Antin stockholders and the balance were placed in escrow which are
        contingently issuable to the stockholders based upon the future operating
        performance of Antin through June 30, 2006. As a result of the terms
        of a
        modification to the original working capital purchase price adjustment, the
        $51,000 value of the 12,565 shares issued directly to the Antin stockholders
        was
        treated as share-based compensation expense in the three months ended September
        30, 2005. The remaining 12,565 shares held in escrow will be recorded as
        share-based compensation expense in the period in which they are
        earned.
 
 **3.
        Accounts receivable:**
  Accounts
        receivables consist of the following:
  September
                  30,
              
              
              June
                  30,2005
              
              
              2005Amounts
                  billed
              
              $
              5,662,000
              
              $
              6,356,000Amounts
                  unbilled:Costs
                  and profits in excess of billings
              
              
              5,497,000
              
              
              4,321,000Retentions,
                  due upon completion of contracts
              
              
              141,000
              
              
              154,000Recoverable
                  costs subject to closure of contracts
              
              
              242,000
              
              
              209,000Allowance
                  for doubtful accounts
              
              
              (64,000
              )
              
              (48,000
              )Totals
              
              $
              11,478,000
              
              $
              10,992,000
 
 At
        September 30, 2005, costs and profits in excess of billings consisted of
        amounts
        billable subsequent to period-end.  The balances comprising receivables
        pursuant to retainage provisions will be due upon completion of the contracts
        and audits of overhead rates by the Defense Contract Audit Agency. Based
        on the
        Company’s experience with similar contracts in recent years, the balances at
        September 30, 2005 are expected to be collected in fiscal 2006, 2007 and
        2008.
  Recoverable
        costs subject to closure of contracts consisted primarily of revenues recognized
        on specific delivery orders as a result of actual indirect expense rates
        exceeding the provisionally approved indirect rates. These receivables will
        be
        billable upon closure of audits of overhead rates of the specific delivery
        orders or the contracts.
  **4.
        Inventory**
 
 Inventory
        consisted of the following:
 September
                  30,
              
              
              June
                  30,2005
              
              
              2005Raw
                  materials
              
              $
              54,000
              
              $
              54,000Work
                  in process
              
              
              7,000
              
              
              7,000Finished
                  goods
              
              
              34,000
              
              
              36,000$
              95,000
              
              $
              97,000
 
 **5.
        Intangible Assets and Goodwill:**
 
 Intangible
        assets consist of the following:
 WeightedAverage
                  
                  
                  GrossAmortization
                  
                  
                  Carrying
                  
                  
                  AccumulatedPeriod
                      (Yrs)
                  
                  
                  Value
                  
                  
                  Amortization
                  
                  
                  NetSeptember
                      30,
                      2005Technology
                  
                  
                  5
                  
                  $
                  609,000
                  
                  $
                  92,000
                  
                  $
                  517,000Customer
                      contracts
                  
                  
                  9
                  
                  
                  570,000
                  
                  
                  68,000
                  
                  
                  502,000Patents
                  
                  
                  15
                  
                  
                  280,000
                  
                  
                  15,000
                  
                  
                  265,000All
                      other
                      intangibles
                  
                  
                  2
                  
                  
                  375,000
                  
                  
                  219,000
                  
                  
                  156,000$
                  1,834,000
                  
                  $
                  394,000
                  
                  $
                  1,440,000June
                      30,
                      2005Technology
                  
                  
                  5
                  
                  $
                  390,000
                  
                  $
                  71,000
                  
                  $
                  319,000Customer
                      contracts
                  
                  
                  10
                  
                  
                  520,000
                  
                  
                  50,000
                  
                  
                  470,000Patents
                  
                  
                  15
                  
                  
                  280,000
                  
                  
                  10,000
                  
                  
                  270,000All
                      other
                      intangibles
                  
                  
                  2
                  
                  
                  313,000
                  
                  
                  184,000
                  
                  
                  129,000$
                  1,503,000
                  
                  $
                  315,000
                  
                  $
                  1,188,000
 Goodwill:
 
 The
        purchase agreement for Xsilogy, Inc., acquired in December 2004, provides
        for
        additional consideration to be earned upon achieving certain milestones.
        As a
        result of a determination during the quarter ended September 30, 2005 that
        certain milestones had been met as of June 30, 2005, Xsilogy is due a cash
        payment of $313,000, which is accrued in other accrued liabilities as of
        September 30, 2005, and the issuance of 80,000 shares of SYS stock at a value
        of
        $376,000, which has been included in common stock issued at September 30,
        2005.
        The total of this consideration was first used to eliminate the contingent
        consideration liability of $97,000 and the balance of $592,000 was recorded
        as
        goodwill.
 
 The
        carrying value of Xsilogy related assets at September 30, 2005 was $1,186,000.
        Since the date of acquisition in December 2004 there has been minimal revenues
        and cash flow generated from the deployment of these assets. If there is
        not a
        significant improvement in the cash flow generated from these assets in a
        reasonable period of time or other evidence of recoverability, consideration
        of
        an impairment charge may be appropriate in a future period.
 
 
  **6.
        Notes payable and other debt**
  Notes
        payable at September 30, 2005 and June 30, 2005 are as
        follows:
 
 Related
                  PartySeptember
                  30,
              
              
              June
                  30,
              
              
              September
                  30,
              
              
              June
                  30,2005
              
              
              2005
              
              
              2005
              
              
              2005Convertible
                  notes payable, unsecured, bear interest at 10% payable quarterly,
                  originally due at various dates starting in November 2004 but extended
                  at
                  option of noteholders to various dates starting in November 2005,
                  convertible at any time into common stock at the rate of $1.00
                  per
                  share.
              
              $
              244,000
              
              $
              319,000
              
              $
              388,000
              
              $
              388,000Convertible
                  notes payable, unsecured, bear interest at 10% per annum payable
                  quarterly, due December 31, 2006, convertible at any time into
                  common
                  stock at a rate of $2.20 per share.
              
              
              875,000
              
              
              887,000
              
              
              713,000
              
              
              713,000Unamortized
                  discount related to convertible notes payable due December 31,
                  2006
              
              
              (34,000
              )
              
              (40,000
              )
              
              (28,000
              )
              
              (32,000
              )Convertible
                  notes payable, issued in conjunction with Polexis acquisition,
                  unsecured
                  and subordinate to the Company's bank debt, bear interest at 10%
                  per annum
                  payable quarterly, due March 31, 2007, convertible at any time
                  into common
                  stock at the rate of $2.32 per share.
              
              
              589,000
              
              
              589,000
              
              
              96,000
              
              
              96,000Convertible
                  note payable, issued in conjunction with Antin acquisition, unsecured,
                  bears interest at 10% per annum payable quarterly, due May 11,
                  2007,
                  convertible at any time into common stock at the rate of $2.50
                  per
                  share.
              
              
              --
              
              
              --
              
              
              196,000
              
              
              196,0001,674,000
              
              
              1,755,000
              
              
              1,365,000
              
              
              1,361,000Less
                  current portion
              
              
              (244,000
              )
              
              (319,000
              )
              
              (388,000
              )
              
              (388,000
              )$
              1,430,000
              
              $
              1,436,000
              
              $
              977,000
              
              $
              973,000
 
 During
        the three months ended September 30, 2005, holders of $88,000 of convertible
        notes payable elected to convert the notes payable into 80,682 shares of
        common
        stock.
 
  
  **7.
        Earnings Per Share**
  Basic
        net
        income per common share is calculated by dividing net income applicable to
        common stock by the weighted average number of common shares outstanding
        during
        the period. The calculation of diluted net income per common share is similar
        to
        that of basic net income per common share, except that the denominator is
        increased to include the number of additional common shares that would have
        been
        outstanding if all potentially dilutive common shares, principally those
        issuable upon the conversion of notes payable and the exercise of stock options
        and warrants, were issued during the period.
 
 The
        following table summarizes the calculation of basic and diluted net income
        per
        common share for each period:
 
 September
                  30,
              
              
              September
                  24,2005
              
              
              2004Numerators:Net
                  income
              
              $
              475,000
              
              $
              304,000Add
                  back - share based compensation expense - options
              
              
              31,000
              
              
              --Add
                  back - interest expense on convertible notes, net of tax
                  effects
              
              
              58,000
              
              
              56,000Net
                  income applicable to common stockholders- diluted
              
              $
              564,000
              
              $
              360,000Denominators:Weighted
                  average shares for basic net income per common share
              
              
              10,880,466
              
              
              8,153,516Add
                  dilutive effect of assumed exercise of stock options and warrants
                  using
                  the treasury stock method
              
              
              984,146
              
              
              775,178Add
                  dilutive effect of assumed conversion of convertible promissory
                  notes
              
              
              1,792,235
              
              
              2,036,272Weighted
                  average shares for diluted net income per common share
              
              
              13,656,847
              
              
              10,964,966Basic
                  net income per common share
              
              $
              0.04
              
              $
              0.04Diluted
                  net income per common share
              
              $
              0.04
              
              $
              0.03
 
 Options
        to acquire 286,000 shares of common stock in 2004 and none in 2005 were excluded
        from the calculation as these options were priced above the average stock
        price
        for the period and therefore would be anti-dilutive. In addition, the weighted
        average related to 200,000 shares issuable upon the exercise of the restricted
        stock purchase agreement and 130,000 shares related to the employee stock
        purchase plan were excluded from the calculation in 2005 because their effect
        would be anti-dilutive.
 
 **8.
        Legal Matters:**
 
 Periodically,
        we are involved in legal actions in the normal course of business, including
        audits and investigations by various governmental agencies that result from
        our
        work as a governmental contractor. There are currently no such legal matters
        outstanding.
  **9.
        Stockholders’ Equity:**
 
 In
        addition to the share-based compensation transactions and other equity
        transaction described elsewhere, the following is a summary of other changes
        to
        stockholder’ equity during the three month period ended September 30,
        2005:
 
 Issuance
        of shares to participants of the ESPP of 88,719 shares valued at $196,000
        in
        satisfaction of the liability at June 30, 2005.
 
 Contribution
        to the Company’s ESOP/401(k) plan of 76,201 shares valued at
        $279,000.
 
 Holders
        of warrants issued in connection with the Company sale of common stock in
        June
        2005 exercised warrants to purchase 102,123 shares at an exercise price of
        $2.50
        per share or $255,000. As of September 30, 2005, there were outstanding
        warrants related to this sale of common stock that are exercisable into 326,166
        shares of common stock at $2.50 per share.
  **10.
          Acquisitions:**
 
 **Acquisition
        of Web Tech:**
 
 On
        August
        22, 2005, in contemplation of entering into an asset acquisition agreement
        with
        Web Technologies, LLC (Web Tech), which was executed on September 30, 2005,
        the
        Company hired 29 employees formerly with Web Tech and entered into subcontract
        agreements with Web Tech on a time and material basis to complete work on
        all
        existing Web Tech contracts. This asset acquisition was accounted
        for as a
        business combination under the purchase method and accordingly, Web Tech’s
        results of operations are included in the Company’s consolidated results of
        operations commencing on August 22, 2005. The consideration consisted of
        $140,000 cash and an additional $100,000 due January 31, 2006 which will
        be
        reduced by the amount of any loss recognized for the period from acquisition
        through December 31, 2005. The amount due January 31, 2006 and $75,000 as
        an
        estimate of transaction expenses are included in other accrued liabilities
        at
        September 30, 2005. The $315,000 total of consideration and estimated direct
        costs have been allocated on a preliminary basis as follows: Equipment-
        $100,000, Intangible assets- $215,000. The intangible assets are being amortized
        over an average of four years. The Company expects to finalize the determination
        of the fair value of the assets acquired in the second quarter of
        2006.
 
 **Acquisition
        of Lomasoft Technology and Intellectual Property:**
 
 On
        September 27, 2005, the Company entered into an agreement to purchase certain
        technology and intellectual property rights related to the ForceViz Technology
        of Lomasoft Corporation. The purchase price consisted of $50,000 cash and
        warrants to purchase 50,000 shares of the Company’s stock at a price of $3.87
        per share. The $65,000 fair value of these warrants was based on the Black
        Scholes model using a 34% expected volatility rate, 4% risk-free interest
        rate,
        an estimated life of five years and assumed no dividends. The agreement provides
        for additional contingent consideration of warrants to purchase 50,000 shares
        of
        SYS common stock at a price equal to $3.87 per share for each of the two
        revenue-based milestones for the years ending June 30, 2006 and 2007. All
        of the
        warrants will have a five year exercise period and piggy-back registration
        rights. The $115,000 total consideration for the technology has been allocated
        to intangible assets at September 30, 2005, which will be amortized over
        7
        years. This transaction was accounted for as an asset purchase and not a
        business combination.
 
 **Acquisition
        of Logic Innovations:**
 
 Subsequent
        to the period end, on November 7, 2005, SYS acquired all of the outstanding
        stock of Logic Innovations, Inc. (Logic), a privately held, San Diego-based
        provider of solutions that ensure the fast and efficient delivery of digital
        audio, video and data to the broadcasting, communications and consumer
        electronics industries for approximately $4,000,000 in cash and stock.
 
 The
        transaction was completed pursuant to an Agreement and Plan of Merger
        (Agreement) by and among the Company, Shadow II, Inc. (a wholly-owned subsidiary
        of the Company), Logic and all of the stockholders of Logic. As a result
        of the
        acquisition, Shadow II became a wholly owned subsidiary of SYS and, therefore,
        will be included in the consolidated financial results of SYS effective for
        periods subsequent to November 7, 2005.
  The
        merger consideration consisted of $2,000,000 in cash and 445,768 shares of
        restricted SYS common stock with a value of $2,070,000 based on an average
        closing price of $4.64. Additional consideration may be earned subject
        to
        achieving future revenue and operating income targets. The excess of the
        Company’s purchase price over the estimated fair value of the net assets
        acquired is preliminarily estimated to be approximately $2,800,000, which
        consists of goodwill and other intangible assets.  An independent
        valuation
        will be performed to determine the purchase price allocation based upon the
        fair
        value of the assets and liabilities acquired, at which time the allocation
        of
        purchase price may be revised. Management expects to complete the independent
        valuation during the second quarter of the current fiscal year.
 
 **Planned
        Acquisition of cVideo:**
 
 On
        November 10, 2005, SYS entered into an Asset Purchase and Sale Agreement
        to
        acquire all of the assets and assume certain specified liabilities of cVideo,
        Inc., a San Diego based provider of interactive video and information analysis
        products for business surveillance and security applications, subject to
        certain
        closing conditions which are anticipated to be completed before December
        30,
        2005. The purchase price consists of approximately $1,400,000 of cash as
        initial
        consideration and additional contingent consideration based on future revenue
        milestones.
 
 **Pro
        Forma Results of Operations:**
 
 On
        December 14, 2004, the Company acquired the assets and assumed certain
        liabilities of Xsilogy, Inc. (Xsilogy). On January 3, 2005, the Company acquired
        all of the outstanding securities of Antin Engineering, Inc. (Antin). As
        discussed above, on August 22, 2005 the Company acquired a business from
        Web
        Tech. The following summary presents pro forma consolidated results of
        operations for the three months ended September 30, 2005 and September 24,
        2004
        as if these acquisitions had occurred as of the beginning of the periods
        presented and includes adjustments that were directly attributable to the
        transaction or were expected to have a continuing impact on the
        Company.
  The
        pro
        forma results are unaudited and for illustrative purposes only for the
        applicable period, and do not purport to be indicative of the actual results
        which would have occurred had the transactions been completed as of the
        beginning of the period, nor are they indicative of results of operations
        which
        may occur in the future.
 
 September
                  30, 2005
              
              September
                  24, 2004As
                  Reported
              
              
              Pro
                  Forma
              
              
              As
                  Reported
              
              
              Pro
                  FormaRevenues
              
              $
              13,094,000
              
              $
              13,836,000
              
              $
              11,107,000
              
              $
              14,100,000Operating
                  income
              
              
              881,000
              
              
              624,000
              
              
              614,000
              
              
              374,000Net
                  income
              
              
              475,000
              
              
              326,000
              
              
              304,000
              
              
              158,000Net
                  income per common share:Basic
              
              $
              0.04
              
              $
              0.03
              
              $
              0.04
              
              $
              0.02Fully
                  diluted
              
              $
              0.04
              
              $
              0.03
              
              $
              0.03
              
              $
              0.02Weighted
                  average shares outstanding:Basic
              
              
              10,880,466
              
              
              11,326,234
              
              
              8,153,516
              
              
              8,923,255Fully
                  diluted
              
              
              13,656,847
              
              
              14,102,615
              
              
              10,964,966
              
              
              12,062,685
 
 The
        basic
        and fully diluted shares outstanding have been adjusted to give effect to
        the
        issuance of 323,971 shares at the time of the Antin acquisition as well as
        327,980 shares that were subsequently issued related to contingent
        consideration, and the issuance of 445,768 shares related to the acquisition
        of
        Logic.
 
 **11.
        Segment Information:**
  During
        the year ended June 30, 2005, the Company reported operating results and
        financial data for two reporting segments: Defense Solutions Group (DSG)
        and the
        Sensor Networking Systems and Products Group (SNG). DSG provided engineering,
        technical, and financial and management services primarily to U.S. Government
        customers. SNG was formed subsequent to the acquisition of the assets of
        Xsilogy
        to provide wireless sensor network technologies and applications to a broad
        base
        of customers including commercial and industrial customers as well as the
        U.S.
        Government. In March 2005, the Company formed a Public Safety and Security
        Division (PSS) as a component for DSG. Antin has been included in the DSG
        segment.
 
 
  Effective
        July 1, 2005 the activities of the SNG and PSS were reorganized into a new
        business group named the Public Safety, Homeland Security and Industrial
        Systems
        Group (PSSIG). This group becomes a reportable business segment in place
        of the
        SNG for reporting in fiscal year 2006. Future revenues in this group will
        include products and equipment sales, software, engineering and installation
        services for industrial and commercial customers as well as government
        customers. Prior year amounts have been restated to reflect the inclusion
        of SNG
        and PSS into the new PSSIG segment.
 
 September
                  30,
              
              September
                  24,2005
              
              
              2004Revenue:DSG
              
              $
              12,102,000
              
              $
              10,960,000PSSIG
              
              
              992,000
              
              
              147,000Totals
              
              $
              13,094,000
              
              $
              11,107,000Income
                  from operations:DSG
              
              $
              815,000
              
              $
              604,000PSSIG
              
              
              66,000
              
              
              10,000Totals
              
              $
              881,000
              
              $
              614,000Identifiable
                  assets:DSG
              
              $
              22,781,000
              
              $
              19,244,000PSSIG
              
              
              3,249,000
              
              
              --Totals
              
              $
              26,030,000
              
              $
              19,244,000Goodwill:DSG
              
              $
              7,469,000
              
              $
              5,371,000PSSIG
              
              
              424,000
              
              
              --Totals
              
              $
              7,893,000
              
              $
              5,371,000Capital
                  expenditures:DSG
              
              $
              98,000
              
              $
              70,000PSSIG
              
              
              89,000
              
              
              --Totals
              
              $
              187,000
              
              $
              70,000Depreciation
                  and amortization:DSG
              
              $
              146,000
              
              $
              117,000PSSIG
              
              
              56,000
              
              
              --Totals
              
              $
              202,000
              
              $
              117,000
 
  
  **Item
        2****.****Management’s
        Discussion and Analysis o****f
        Financial Condition and Results of Operations**
 
 *To
        the extent that the information presented in this quarterly report discusses
        financial projections, information or expectations about our business plans,
        results of operations, products or markets, or otherwise makes statements
        about
        future events, such statements are forward-looking. Such forward-looking
        statements can be identified by the use of words such as intends, anticipates,
        believes, estimates, projects, forecasts, expects, plans and proposes.*
 
 *Although
        we believe that the expectations reflected in the forward-looking statements
        are
        reasonable, we cannot guarantee future results, levels of activity, performance
        or achievements. Moreover, neither we, nor any other person, assume
        responsibility for the accuracy and completeness of the forward-looking
        statements. We are under no obligation to update any of the forward-looking
        statements after the filing of this Quarterly Report on Form 10-Q to conform
        such statements to actual results or to changes in our
        expectations.*
 
 *The
        following discussion should be read in conjunction with our unaudited
        consolidated financial statements and the related notes and other financial
        information appearing elsewhere in this Form 10-Q. Readers are also urged
        to
        carefully review and consider the various disclosures made by us which attempt
        to advise interested parties of the factors which affect our business, including
        without limitation the disclosures made under the caption Management’s
        Discussion and Analysis of Financial Condition and Results of Operations,æ under
        the caption Risks Related to Our Business,æ and the audited consolidated
        financial statements and related notes included in our Annual Report filed
        on
        Form 10-KSB for the year ended June 30, 2005 and other reports and filings
        made
        with the Securities and Exchange Commission.*
 
 
 **Overview**
 
 SYS
        and
        its subsidiaries provide real-time information technology solutions and wireless
        communications systems for a wide variety of government and large industrial
        customers. SYS provides these capabilities through the sale of multiple-year
        engineering and management services, off-the-shelf component products, and
        end-to-end systems development.
 Our
        core
        expertise is in real-time sensor capture, wireless radio communications and
        networking, communications software development and integration. We also
        provide
        applications in the areas of decision support, data visualization, and tailored
        applications supporting the communications network. These capabilities are
        applied to specific customer’s needs including command and control systems,
        real-time safety and security solutions and other decision support systems
        markets. In addition, SYS offers its customers project management, financial
        management, training, and logistic support services.
 
 Historically,
        our revenues have been generated by providing services to the Department
        of
        Defense (DoD). However, we have a growing revenue base with other U.S.
        Government agencies including the National Aeronautics and Space Administration
        (NASA) and the Department of Homeland Security (DHS), municipal and state
        governments, and with Fortune 1000 companies in the industrial marketplace.
 
 The
        Company has two reportable business segments. The Defense Solutions Group
        (DSG)
        and the Public Safety, Homeland Security and Industrial Systems Group (PSSIG).
 
 The
        DSG
        provides engineering, technical, and financial management services primarily
        to
        U.S. Government customers including the DoD and other agencies. The business
        of
        the DSG can be further categorized into two broad categories, namely Command,
        Control, Computers, Communications, Intelligence, Surveillance and
        Reconnaissance (C4ISR) and legacy businesses. The C4ISR business supports
        agencies and organizations of the DoD and the Department of Homeland Security
        (DHS) by providing systems engineering and systems integration, software
        development, geospatial information systems and situational awareness tools.
        The
        legacy business supports a broad spectrum of program management, infrastructure
        management and business operations functions principally for U.S. Government
        or
        DoD customers.
 
 The
        PSSIG
        was formed on July 1, 2005 to consolidate the activities previously performed
        in
        the (i) Sensor Networking Systems and Products Group (ii) the Public Safety
        and
        Security Division and (iii) programs previously captured in the DSG where
        the
        activities were focused on public safety and security. This group leverages
        the
        capabilities acquired through prior acquisitions together with our other
        core
        capabilities including software integration and geospatial information
        processing, as well as our success on similar projects. The PSSIG offers
        a
        comprehensive solution to our customer base addressing homeland security
        and
        business security issues at the federal, state, and local levels.
 
 The
        PSSIG
        draws on technical resources throughout SYS to effect timely and reliable
        solutions to meet the command and response needs of fire and law enforcement
        as
        well as other agencies in crisis environments. The scope of this effort involves
        the application of existing SYS sensor technology, wireless sensor networking,
        the application of service oriented internet architectures, information
        visualization, and decision support technologies. The formation of this new
        group reflects our commitment to applying our technology base to solving
        homeland security and homeland defense issues.
 
 Our
        revenues have grown internally by establishing new business units with
        experienced senior executives who have the ability to grow these business
        units
        and expand our customer base and to a lesser extent, through acquisitions
        of
        other government and non-government technology companies. Our objective is
        to
        continue growing revenues organically and through acquisitions. In order
        to
        assist in accomplishing this objective, we have continued to increase our
        selling, general and administrative expenditures so as to increase our efforts
        in new business development and to provide the necessary infrastructure to
        support a larger organization. We plan to selectively acquire companies that
        complement and enhance our existing businesses and will allow us to broaden
        our
        customer base. We are currently reviewing potential targets. We anticipate
        that
        we will need to obtain additional financing through the sale of equity or
        debt
        securities to fund these acquisitions.
 
 We
        expect
        that these trends will continue and we also expect that with the expanded
        capabilities we’ve acquired, together with our existing capabilities that we
        will be able to bid on larger government contracts and programs. We also
        expect
        to continue to participate in recompetes on our existing contracts. Our rate
        of
        revenue growth depends upon many factors, including, among others, our success
        in bidding on new contracts and re-competes of our existing contracts, the
        continuation of our existing programs, the rate of demand for services or
        products under our contracts, the funding levels for our contracts, our ability
        to meet demand for our services or products and the ability to grow the
        businesses of our acquired companies.
 
 Our
        gross
        margins (revenues less contract costs) are affected by the mix of contract
        types
        (cost reimbursement, fixed-price or time and materials) as well as the mix
        of
        prime contracts versus subcontracts. Significant portions of our contracts
        are
        time and materials and cost reimbursement contracts. Subject to contract
        limits,
        we are reimbursed for labor hours at negotiated hourly billing rates and
        other
        direct expenses under time and materials contracts and reimbursed for all
        actual
        costs, plus a fee, or profit, under reimbursement contracts. The financial
        risks
        under these contracts are generally lower than those associated with other
        types
        of contracts, and margins are also typically lower than those on fixed-price
        contracts. The U.S. Government also has awarded us fixed-price contracts.
        Such
        contracts carry higher financial risks because we must deliver the products,
        systems or contract services at a cost below the fixed contract value in
        order
        to earn a profit.
 
 The
        following table shows our revenues from each of these types of contracts
        as a
        percentage of our total revenue for the following periods:
 
 Quarter
                  EndedSeptember
                  30, 2005
              
              September
                  24, 2004Cost
                  reimbursable
              
              79%
              
              64%Time
                  and materials
              
              14%
              
              27%Fixed
                  price
              
              7%
              
              9%Total
              
              100%
              
              100%
 
  We
        have
        derived a majority of our revenues from U.S. Government contracts under which
        we
        act as a prime contractor. We also provide services indirectly as a
        subcontractor. We intend to focus on retaining and increasing the percentage
        of
        our business as prime contractor because it provides us with client
        relationships that generate higher levels of revenue.  Currently our
        mix of
        contracts consists of approximately 51% prime contracts and 49%
        subcontracts.
 
 As
        of
        September 30, 2005, the Company’s delivery order and contract tasking
        backlog totaled approximately $29.0 million, of which $17.0 million was funded
        and $12.0 million had been ordered, but not yet funded.  As of
        September 24, 2004 the delivery order and contract tasking backlog
        totaled
        approximately $27.0 million, of which $14.0 million was funded and $13.0
        million
        had been ordered, but not yet funded. Backlog yet to be funded is generally
        funded on an incremental basis.
 
 All
        of
        our U.S. government contracts are subject to audit and various cost controls,
        and include standard provisions for termination for the convenience of the
        U.S.
        government. Multi-year U.S. government contracts and related orders are subject
        to cancellation if funds for contract performance for any subsequent year
        become
        unavailable.
 
 Management
        currently considers the following events, trends and uncertainties to be
        important to understanding its financial condition and operating performance.
        Almost all of the areas that generate opportunities for SYS also generate
        risks
        at the same time. The following demonstrates some of these opportunities
        and
        risks for several areas.
 
 ·
              **Contract
                  Type**.
                  Federal Government contracting practices tends to run in cycles.
                  The
                  preferred form of contracting varies and ranges from large contracts
                  with
                  multiple subcontractors and wide areas of work scope to small contracts
                  with more specific areas of scope. Unless the Government has a
                  very
                  specific requirement most of this work is done on an indefinite
                  delivery
                  indefinite quantity cost plus fixed fee basis. In general, the
                  Government
                  is now trending towards issuing large Multiple Award Contracts
                  (MAC’s)
                  where multiple winners continue to compete on a task by task basis.
                  This
                  trend was reinforced through the SeaPort-Enhanced MAC contract
                  that is
                  envisioned to become a key contracting component for NAVSEA in
                  the future
                  and be of great potential benefit to SYS. All tasks awarded under
                  the
                  SeaPort-Enhanced MAC type contracts will be competitively bid among
                  all
                  eligible MAC holders. In addition, the cost plus nature of these
                  tasks
                  reduces performance risks but lowers the opportunity to make larger
                  fees.
 
 The
                  task awards are frequently awarded on a cost plus basis, cover
                  a broader
                  spectrum of activity and in general favor large businesses. SYS
                  has been
                  awarded a SeaPort-Enhanced contract which offers opportunity for
                  SYS to
                  bid on areas that it might not otherwise have an opportunity to
                  bid. On
                  the other hand, if the scope of the task is too large it may exceed
                  SYS’s
                  ability to respond. Despite the desire of upper level Government
                  management to convert these contracts to fixed price contracts
                  this is not
                  usually achieved due to a lack of well defined specifications of
                  the work
                  to be performed. Thus, increasingly SYS is competing with larger
                  companies
                  for cost plus contract opportunities that do not effectively consider
                  innovation in the pricing evaluation and favor larger businesses
                  doing
                  business as usual where they may have a competitive pricing advantage
                  and
                  the advantage of performing on a larger scope of work. Reduction
                  of this
                  risk will depend on SYS’s ability to convince the Government that they can
                  get better product at a better value by issuing more focused tasks
                  versus
                  large generic tasks.
 
 In
                  addition, SYS will lobby for time and materials or fixed price
                  contracts
                  where SYS can be more agile and creative with process, technology,
                  expertise, and management functions to provide a solution and to
                  reduce
                  the price for the customer.
 
 ·
              **Crises.**The US Government is currently prosecuting a major war time effort
                  in
                  Iraq, a major world wide global war on terrorism including troops
                  in
                  Afghanistan and other countries, as well as domestic crises caused
                  by
                  floods, hurricanes and other disasters. Certainly, the work that
                  SYS is
                  doing in regards to information connectivity, sensor networking,
                  and
                  command and control provides solutions to the real-time information
                  and
                  communications challenges faced in the efforts to address these
                  crises.
                  However, the funding for research and development or purchase of
                  product
                  to assist in dealing with future disasters often suffers while
                  the rescue
                  and rebuilding are in process. Our ability to generate decision
                  support
                  tools which will help in the response to future crises may be recognized
                  but, there may not be funding to purchase our product and to provide
                  funds
                  to rebuild in the disaster areas. We believe that some of our efforts
                  will
                  be accelerated and some will slow down during the rebuilding
                  process.
 
 ·
              **Revenue
                  Mix.**Our
                  business areas that encompass program management, financial management,
                  base support, and logistics support (together legacy business or
                  infrastructure support) have been in a continuous slow decline
                  for the
                  past five years while during this same period our C4ISR business
                  has
                  steadily grown. We anticipate that this trend will continue as
                  the DoD
                  continues to implement their Information Transformation focusing
                  on
                  enhanced information technology and communications systems, data
                  acquisition and real time situational awareness on such programs
                  as
                  Composable FORCEnet and Battle Force Composite Network, and Integrated
                  Autonomous Network Management.
 
 We
        believe growth in the legacy area will come from the following areas: (i)
        increasing usage of technology to reduce ongoing support costs, (ii) adoption
        by
        the Government of the use of process improvement to achieve cost reduction,
        (iii) charge lower prices per hour, and (iv) capturing a greater market share.
        Some of these approaches may result in lower margins.
 
 The
        area
        of infrastructure support is continuously reduced in order to fund other
        needs
        such as the war on terrorism, the Iraq War, as well as hurricane and other
        disaster relief. The specific risk to SYS is whether the growing information
        connectivity business can exceed the rate at which this infrastructure business
        is diminishing and whether SYS can capture a larger market share in this
        area.
 
 ·
              **Net
                  Centric Warfare.**The concept of using Net Centric approaches (an information
                  superiority-enabled concept of operations that generates increased
                  combat
                  power by networking sensors, decision makers, and shooters to achieve
                  shared awareness, increased speed of command, higher tempo of operations,
                  greater lethality, increased survivability, and a degree of
                  self-synchronization) as a force multiplier is gaining momentum.
                  SYS is
                  very involved in key components in this arena which has applications
                  in
                  the DoD, local and state governments, and industrial firms. SYS’s core
                  strengths in the C4ISR and knowledge management arenas coupled
                  with the
                  acquisitions of Polexis, Xsilogy and Antin Engineering have provided
                  SYS
                  with key elements for these solutions including systems and software
                  engineering services, software products and tools, wireless sensor
                  networking products and command response systems. While management
                  believes that we have assembled key technologies and solutions
                  to
                  effectively compete in the Net Centric business as DoD funding
                  continues
                  to increase in this arena, increased attention will also be forthcoming
                  from larger businesses such as Lockheed, General Dynamics, and
                  Northrop
                  Grumman. As discussed before SYS has a pricing advantage over these
                  companies for many areas, but these larger businesses have the
                  advantage
                  of tackling larger programs with a broader scope of
                  work.
 
 ·
              **SYS
                  Strategy**.
                  Our business growth strategy is focused on continuing to develop
                  our core
                  strengths in C4ISR, information technology, and systems integration
                  while
                  adding products and capabilities that will allow us to grow our
                  markets in
                  these areas as well as expand into other markets, including commercial
                  and
                  industrial markets. We intend to accomplish this growth strategy
                  through
                  acquisitions and through productizing capabilities and solutions
                  developed
                  through our engineering services. We believe that this strategy
                  will
                  enable us to diversify our revenue sources, compete for larger
                  DoD
                  programs and grow our operating margins, especially through the
                  inclusion
                  of products. Three key aspects of this strategy are as
                  follows:
 
 o
              **Timing**.
                  The process of transforming a company from a legacy service provider
                  to
                  one providing a mix of high technology services and products has
                  to be
                  done in a staged fashion. As the revenues from the legacy revenues
                  decrease new revenues from new customers need to be generated in
                  a
                  coincident fashion.
 
 o
              **Products.**Moving to greater product revenues has great potential for SYS.
                  The
                  primary issue is time. The products have to be effective and timely.
                  It is
                  challenging for a small company to put the total effort required
                  into a
                  new product and to do so in a timely fashion while generating quarterly
                  profits. We are also creating the infrastructure to effect product
                  development, marketing, sales, manufacturing and distribution.
                  We have
                  some risk in coming to the market too late or with generating new
                  sales to
                  cover the new expenses. We intend to develop the products in a
                  timely
                  manner and maintain our profitability, but near term quarterly
                  revenue and
                  profit could be impacted if there is a delay in
                  sales.
 
 **Acquisitions** .
        One of
        the ways to deal with creating additional capabilities (e.g. products or
        niche
        service areas that broaden offerings) is to acquire smaller companies that
        have
        these capabilities. As we accelerate the process, we have to have the existing
        infrastructure in place to accommodate the new organizations and have them
        adapt
        to our systems and methodologies. We also need to have the resources and
        talent
        to recognize and evaluate these opportunities and to price them in a fashion
        that makes the process ultimately viable. We are at risk that not all of
        the
        acquisitions will be viable and a write down of any of these will be detrimental
        to quarterly earnings. As of
        September 30, 2005, the carrying value of Xsilogy related assets was $1,186,000.
        Since the date of acquisition in December 2004 there has been minimal revenues
        and cash flow generated from the deployment of these assets. If there is
        not a
        significant improvement in the cash flow generated from these assets in a
        reasonable period of time or other evidence of recoverability, consideration
        of
        an impairment charge may be appropriate in a future period.
   
  
  **Results
        of Operations**
 
 The
        following table sets forth certain items, including consolidated revenues
        for
        the first quarter of fiscal years 2006 and 2005 (in thousands):
 
 
 September
                  30,
              
              
              
              
              
              September
                  24,2005
              
              
              %
              
              
              2004
              
              
              %Revenues
              
              $
              13,094
              
              
              100.0
              %
              $
              11,107
              
              
              100.0
              %Operating
                  costs and expenses:Contract
                  costs
              
              
              10,235
              
              
              78.2
              %
              
              9,506
              
              
              85.6
              %General
                  & administrative expenses
              
              
              1,978
              
              
              15.1
              %
              
              987
              
              
              8.9
              %Total
                  operating costs and expenses
              
              
              12,213
              
              
              93.3
              %
              
              10,493
              
              
              94.5
              %Income
                  from operations
              
              
              881
              
              
              6.7
              %
              
              614
              
              
              5.5
              %Other
                  income
              
              
              36
              
              
              0.3
              %
              
              --
              
              
              --Interest
                  expense
              
              
              (99
              )
              
              -0.8
              %
              
              (114
              )
              
              -1.0
              %Income
                  before income taxes
              
              
              818
              
              
              6.2
              %
              
              500
              
              
              4.5
              %Income
                  tax provision
              
              
              343
              
              
              2.6
              %
              
              196
              
              
              1.8
              %Net
                  income
              
              $
              475
              
              
              3.6
              %
              $
              304
              
              
              2.7
              %
 
 
 *Revenues.* For
        the
        first quarter of 2006, our revenues increased by approximately $2.0 million
        or
        18% to $13.1 million from $11.1 million for the same period in 2005. The
        increase in revenues was primarily attributable to the acquisitions of Antin
        in
        January 2005 which provided $2.0 million of revenues and WebTech in August
        2005
        which provided $300,000 of revenues. Additional increases were derived from
        support of C4ISR initiatives such as the Composable FORCEnet and Battle Force
        Composite Network, Integrated Autonomous Network Management which grew by
        $1.0
        million over the prior year. These total increases of approximately $3.3
        million
        were offset by a net $1.3 million reduction in revenues on the legacy business
        programs, primarily in the NMCI, UNREP and MSS programs, all of which were
        due
        to planned decreases in activities by those customers.
 
 Revenues
        by operating segment for the quarters ended September 30, 2005 and September
        24,
        2004 are as follows (in thousands):
  **2005**
              
              
              **2004**
              
              
              **Increase**DSG
              
              $
              12,102
              
              $
              10,960
              
              $
              1,142PSSIG
              
              
              992
              
              
              147
              
              
              845Total
                  revenues
              
              $
              13,094
              
              $
              11,107
              
              $
              1,987
 
 As
        previously discussed, revenues related to programs previously captured in
        the
        DSG, where the activities were focused on public safety and security, have
        been
        included in the PSSIG to reflect the nature of the business being performed.
        The
        growth in the PSSIG operating segment is primarily attributable to growth
        in the
        following programs: (i) Office of Disaster Preparedness (ODP) Interoperable
        Communications Technology Assistance (ITP) focused on interoperable
        communications for public safety; (ii) the Joint Warning and Reporting Network
        (JWARN), a program that provides the military services near real-time
        operational capabilities to collect, analyze and report nuclear, biological
        and
        chemical agent detections, identification, location and warning information;
        and
        (iii) Composeable FORCEnet used in various homeland security related scenarios
        including hurricane Katrina relief efforts and other first responder situations.
        All of these programs had significant growth over the prior year.
 
 *Contract
        costs.* Contract costs include all direct costs such as labor, materials and
        subcontractor costs.  Contract costs also include indirect overhead
        costs
        such as facilities, indirect labor, fringe benefits and other discretionary
        costs which are pooled and allocated to contracts on a pro rata basis.
        Generally, changes in direct costs are correlated to changes in revenue as
        resources are consumed in the production of that revenue.
  As
        a
        percentage of revenue, contract costs were 78.2% for the first quarter of
        2006
        as compared to 85.6% for the same period in 2005 resulting in gross margins
        of
        21.8% and 14.4% respectively.   The increase in margins is due to
        (i) a
        higher mix of direct labor costs in 2006 which carries a higher margin than
        other contract costs and (ii) completion of certain fixed price contracts
        where
        profit margins improved over the duration of the contract.
 
 *Selling,
        general and administrative expenses.* Selling, general and administrative (SG&A) expenses include indirect labor,
        fringe benefits, sales and marketing, bid and proposal (B&P), internal
        research and development (IR&D) and other indirect costs. SG&A increased
        by approximately $1.0 million from $1.0 million to $2.0 million and as a
        percentage of revenues increased from 8.9% to 15.1%. On a quarterly sequential
        basis, SG&A has increased from approximately $1.4 million in the last
        quarter of 2005 to $2.0 million in the first quarter of 2006. These increases
        were due to investments made to expand our infrastructure to accommodate
        the
        increased scope of business operations from recent growth and acquisitions.
        In
        the first quarter of fiscal 2006, further planned expenditures have been
        made to
        increase our sales and marketing efforts as well as increases to activities
        related to B&P and IR&D. We anticipate that we will maintain this level
        and may increase the amount of SG&A expenditures during fiscal 2006 as we
        develop new business lines, pursue acquisitions, sales and marketing activities
        and research and development, which may increase SG&A as a percentage of
        revenues. SG&A includes share-based compensation costs incurred during the
        quarter ended September 30, 2005 of approximately $156,000 which included
        expenses associated with stock options granted to employees and the employee
        stock purchase plan. The recognition of these share-based compensation expenses
        is in accordance with FASB No. 123R, which was adopted for the first time
        in the
        current quarter.
 
 *Income
        from operations.* Income
        from operations as a percentage of revenues increased from 5.5% in the first
        quarter of the prior year to 6.7% in the current year. This increase is
        primarily due to the improvement in gross margins achieved through a higher
        mix
        of direct labor, the impact of the fixed price contracts completed in the
        quarter and end-user software license revenues of approximately $170,000
        which
        carry a higher margin than the contract services business.
  *Interest
        expense.* Interest
        expense decreased to approximately $100,000 in the first quarter of fiscal
        2006
        from $114,000 in 2005. This decrease is primarily attributable to the conversion
        of $685,000 of convertible notes payable into common stock during the third
        quarter of 2005.
  *Income
        tax provision.* The
        income tax provision as a percentage of income before taxes was 42% in the
        first
        quarter of 2006 and 39% in the first quarter of 2005. The increase is primarily
        attributable to $68,000 of share-based compensation expense recorded in 2005
        for
        which there is no corresponding tax benefit.
 
  **Liquidity
        and Capital Resources**
 
 At
        September 30, 2005, SYS had cash of $3.3 million. This represents an overall
        decrease of approximately $219,000 during the first quarter. The decrease
        is
        primarily due to (i) cash used in operating activities of $596,000 and which
        included $750,000 of fiscal year 2005 incentive compensation payments and
        (ii)
        cash used in investing activities of $325,000 which included $215,000 for
        acquisitions. These cash uses were partially offset by $702,000 in cash provided
        by financing activities which included $413,000 from the exercise of stock
        options and warrants.
  Net
        working capital was $9.3 million at September 30, 2005 compared to $8.1 million
        at June 30, 2005. The primary reasons for the $1.2 million
        increase in
        net working capital were an increase to current assets of $353,000 and a
        decrease in current liabilities by $864,000. Current assets increased due
        to an
        approximate $486,000 increase in accounts receivable, which increased from
        $11.0
        million to $11.5 million offset by a $219,000 reduction in cash. Current
        liabilities decreased due to a $234,000 decrease in accounts payable and
        a $1.0
        million decrease in accrued payroll and related expenses due to the payment
        of
        annual incentive bonus payments for fiscal year 2005 paid during the first
        quarter of 2006. These decreases were partially offset by increases in other
        accrued liabilities and income taxes payable which amounted to
        $472,000.
  SYS
        has
        convertible notes payable totaling $3.1 million consisting of $632,000 remaining
        from a $2.0 million private placement completed during 2002; $1.6 million
        remaining (excluding $62,000 of note discount) from a $3.2 million private
        placement completed during 2004, $685,000 issued in connection with the
        acquisition of Polexis and $196,000 issued in connection with the Antin
        acquisition. The $632,000 balance of convertible notes payable from the 2002
        private placement will mature in the second quarter of this fiscal year.
        Our
        expectation is that all of the note holders will elect to convert their notes
        into common stock due to the one dollar per share conversion price.
  Our
        net
        assets increased by $2.1 million as of September 30, 2005 to $17.5 million.
        Additions to furniture and equipment were $187,000 during the quarter due
        to the
        acquisition of furniture, equipment and software. SYS establishes a capital
        expenditures plan each year in connection with its annual budgeting process.
        SYS
        estimates that its capital expenditures for its current operations during
        the
        2006 fiscal year will range from $500,000 to $750,000.
  Our
        sources of liquidity are cash generated by operations and our revolving line
        of
        credit facility for $4.0 million that expires on December 28, 2006.
        Our
        revolving line of credit facility had a zero balance and had available borrowing
        capacity of $4.0 million at September 30, 2005.
 
 The
        $4.0
        million revolving line of credit facility allows SYS to use (i) the full
        $4.0
        million for working capital purposes or (ii) under a Sub Facility, up to
        $2.0
        million of the credit facility for permitted acquisition purposes and $750,000
        for minority investment purposes. SYS must maintain certain financial covenants,
        including tangible effective net worth, current assets to current liabilities,
        debt to worth and cash flow coverage. The line of credit is subject to certain
        restrictions on permitted acquisitions and minority investments, and in some
        cases must receive the lender’s consent prior to using the facility for such
        purposes. If used for permitted acquisitions or minority investments these
        advances must be repaid over 48 months. SYS has the option of being charged
        prime plus 0.25% or LIBOR plus 300 basis points on the credit facility and
        prime
        plus 0.50% or LIBOR plus 325 basis points on the sub facility subject to
        minimum
        advance amounts and duration under the LIBOR option.
 
 The
        loan
        is collateralized by all of our assets including accounts receivable. Borrowings
        are limited to 80% of our billed accounts receivable that are less than
        90 days old. The lending agreement requires SYS to maintain certain
        covenants, including those described above, and at September 30, 2005
        SYS was in compliance with all of those covenants.
  Management
        believes that SYS will have sufficient cash flow from operations and funds
        available under the revolving credit agreement to finance its operating and
        capital requirements through December 28, 2006.  Long-term
        liquidity
        and continued acquisition related growth will depend on our ability to manage
        cash, raise cash and maintain profitability.
 
 **Off-Balance
        Sheet Arrangements**
 
 SYS
        does
        not have any off-balance sheet arrangements.
 
 **Critical
        Accounting Policies and Estimates**
 
 Our
        discussion and analysis of our financial condition and results of operations
        are
        based upon our consolidated financial statements, which have been prepared
        in
        accordance with accounting principles generally accepted in the United States.
        The preparation of these financial statements requires management to make
        estimates and judgments that affect the reported amounts of assets, liabilities,
        revenues and expenses, and related disclosure of contingent liabilities.
        On an
        ongoing basis, management evaluates its estimates, including those that relate
        to revenues and customer billings, recovery of indirect costs, long-lived
        assets, intangible assets, income tax contingencies, share-based compensation
        and litigation. Management bases its estimates on historical experience and
        on
        various other assumptions that are believed to be reasonable under the
        circumstances, the results of which form the basis for making judgments about
        the carrying values of assets and liabilities that are not readily apparent
        from
        other sources. Actual results may differ from these estimates under different
        assumptions and conditions. If actual results significantly differ from
        management’s estimates, our financial condition and results of operations could
        be materially impaired.
 
 SYS
        believes the following critical accounting policies affect its more significant
        judgments and estimates used in the preparation of its consolidated financial
        statements.
 
 SYS
        contracts with its government customers using various cost-type contracts.
        They
        include cost-plus fixed fee, cost-plus award fee, cost-plus incentive fee
        with
        incentives based upon both cost and/or performance, and cost sharing contracts.
        Revenues and profits are recognized in accordance with Accounting Research
        Bulletin No. 45 and SOP 81-1. For award and incentive fee type contracts,
        we recognize the expected fee to be awarded by the customer at the time such
        fee
        can be reasonably estimated, based on factors such as our prior award experience
        and communications with the customer regarding our performance, including
        any
        interim performance evaluations rendered by the customer. Revenues are
        recognized under fixed-price contracts based on the percentage-of-completion
        basis, using the cost-to-cost or units-of-delivery methods. To the extent
        that
        our estimated costs materially change, our revenues recorded under such
        contracts could materially be affected and could have a material adverse
        effect
        on our operations in the future periods. In the quarter ended September 30,
        2005, approximately 7% of our total revenues were generated by fixed-price
        contracts. The remaining 93% of our revenues in the quarter ended September
        30,
        2005 were generated by cost reimbursable and time and materials contracts,
        for
        which percentage-of-completion is not used, and revenues are generally
        recognized as work is performed and billed to the customer.
 
 In
        general, SYS does not recognize revenues in excess of the allowable funding
        limitations on any delivery order or contract until negotiations are finalized.
        On occasion, our customers request that we proceed on a tasking in advance
        of
        the formal contract modification. We evaluate these requests according to
        their
        characteristics and the circumstances in which they occur after taking all
        factors into consideration such as probability of cost recovery, our experience
        with the customer, and satisfactory evidence that supports the customer’s intent
        to issue the modification. If revenue recognition criteria are met, we record
        revenue equal to costs incurred until such time as contract modifications
        are
        finalized. If our assessment for the probability of cost recovery changes
        in a
        subsequent period due to a change in circumstances then the revenues associated
        with those costs incurred may be reversed.
 
 Contract
        costs, including indirect costs, on certain U.S. Government contracts are
        subject to audit by the Defense Contract Audit Agency (DCAA) before final
        payment is received. We record revenues and accounts receivable at amounts
        expected to be realized upon final settlement.
 
 SYS
        also
        derives revenues from the design and management of sensor networks which
        may
        include equipment, software, services and installation. SYS recognizes revenue
        when all of the following criteria have been met:
 
 ·
              Persuasive
                  evidence of an arrangement exists;
 ·
              Delivery
                  has occurred or services have been
                  rendered;
 ·
              The
                  fee for the arrangement is fixed or determinable;
                  and
 ·
              Collectibility
                  is reasonably assured.
 
 In
        some
        instances, SYS enters into multiple-element arrangements, which may include
        any
        combination of monthly Application Service Provider (ASP) services, professional
        consulting services or equipment sales. Accordingly, the Company separates
        its
        deliverables into units of accounting and recognizes revenue on these
        deliverables, consistent with the provisions of Emerging Issues Task Force
        (EITF) Issue No. 00-21, Accounting for Revenue Arrangements with Multiple
        Deliverables.
 
 Our
        accounts receivable balances include unbilled receivables which are comprised
        of
        work-in-process which will be billed in accordance with contract terms and
        delivery schedules, as well as amounts billable upon final execution of
        contracts, contract completion, milestones or completion of rate negotiations.
        Payments to us for performance on certain of our U.S. Government contracts
        are
        subject to audit by the DCAA, and are subject to government funding. We provide
        an allowance against our receivables for estimated losses that may result
        from
        rate negotiations and audit adjustments. To the extent that actual adjustments
        due to rate negotiations or audit adjustments differ from our estimates,
        our
        revenue may be impacted. Historically, SYS has not required significant
        allowances for these risks.
 
 Since
        our
        primary customer is the U.S. Government, SYS historically has not recorded
        significant charges for bad debt expense. Bad debt charges, if needed, are
        recognized in the period in which they are identified.
 
 The
        carrying value of our deferred tax assets, which are netted against deferred
        tax
        liabilities, assumes that SYS will be able to generate sufficient future
        taxable
        income, based on estimates and assumptions. If these estimates and assumptions
        change in the future, SYS may be required to record valuation allowances
        against
        its deferred tax assets resulting in additional income tax expenses. The
        likelihood of a material change in our expected realization of these assets
        is
        dependent on future taxable income, our ability to deduct tax loss carryforwards
        against future taxable income and the effectiveness of our tax planning
        strategies.
 
 Goodwill
        represents the excess of costs over fair value of assets of businesses acquired.
        Effective January 1, 2002, SYS adopted SFAS No. 142, åGoodwill and
        Other Intangible Assets,æ which establishes financial accounting and reporting
        for acquired goodwill and other intangible assets and supersedes APB Opinion
        No. 17, Intangible Assets. Goodwill and intangible assets acquired
        in a
        purchase business combination and determined to have an indefinite useful
        life
        are not amortized, but instead tested for impairment at least annually in
        accordance with the provisions of SFAS No. 142. SFAS No. 142
        also
        requires that intangible assets with estimable useful lives be amortized
        over
        their respective estimated useful lives to their estimated residual values,
        and
        reviewed for impairment in accordance with SFAS No. 144, Accounting
        for
        Impairment or Disposal of Long-Lived Assets.
 
 SFAS
        No. 142 requires that goodwill be tested for impairment at the reporting
        unit level at adoption and at least annually thereafter, utilizing a two
        step
        methodology. The initial step requires SYS to assess whether indications
        of
        impairment exist. If indications of impairment are determined to exist, the
        second step of measuring impairment is performed, wherein the fair value
        of the
        relevant reporting unit is compared to the carrying value, including goodwill,
        of such unit. If the fair value exceeds the carrying value, no impairment
        loss
        is recognized. However, if the carrying value of the reporting unit exceeds
        its
        fair value, the goodwill of the reporting unit is impaired.
 
 SYS
        performs its annual testing for impairment of goodwill and other intangible
        assets in the fourth quarter of each year, prior to the release of the financial
        statements for the current year. Based on management’s annual testing as of the
        fourth quarter of 2005, there were no indications of impairment.
 
 Share-Based
        Compensation: Beginning on July 1, 2005 we account for our employee stock
        purchase plan (ESPP), stock plans and other forms of share-based compensation
        under the provisions of SFAS No. 123R. SFAS No. 123R requires the recognition
        of
        the fair value of share-based compensation in net income. The fair value
        of our
        share-based compensation was estimated using a Black-Scholes option valuation
        model. This model requires the input of highly subjective assumptions and
        elections in adopting and implementing SFAS No. 123R, including expected
        stock
        price volatility and the estimated life of each award. The fair value of
        share-based awards is amortized over the vesting period of the award and
        we have
        elected to use the straight-line method for awards granted after the adoption
        of
        SFAS No. 123R and continue to use a graded vesting method for awards granted
        prior to the adoption of SFAS No. 123R. Prior to the adoption of SFAS No.
        123R,
        we accounted for our share-based compensation under the provisions of Accounting
        Principles Board (APB) Opinion No. 25 Accounting For Stock Issued to Employees
        (APB No. 25) and Financial Accounting Standards Board (FASB) Interpretation
        No.
        44, Accounting for Certain Transactions Involving Stock Compensation — an
        Interpretation of APB Opinion No. 25æ and made pro forma footnote disclosures as
        required by Statement of Financial Accounting Standards (SFAS) No. 148,
        Accounting For Stock-Based Compensation - Transition and Disclosure, which
        amends SFAS No. 123, Accounting For Stock-Based Compensation. Pro forma net
        income (loss) and pro forma net income (loss) per share disclosed in the
        footnotes to our condensed consolidated financial statements were estimated
        using a Black-Scholes option valuation model.
 **Risks
        Related to Our Business**
  *You
        should carefully consider the following risk factors and all other information
        contained herein as well as the information included in our Annual Report
        on
        Form 10-KSB for the year ended June 30, 2005, and other reports and filings
        made
        with the Securities and Exchange Commission in evaluating our business and
        prospects. Risks and uncertainties, in addition to those we describe below,
        that
        are not presently known to us or that we currently believe are immaterial
        may
        also impair our business operations. If any of the following risks occur,
        our
        business and financial results could be harmed, and the price of our common
        stock could decline.  You should also refer to the other information
        contained in this report, including our consolidated financial statements
        and
        related notes.*
 
 **We
        have depended upon a single customer, the U.S. Government, for the majority
        of
        our revenues to date, and a decrease in its demand for our services might
        harm
        our operating results.**
  A
        substantial part of our business at the present time is with the DoD. Even
        though the level of business with this customer is growing and we have
        negotiated multiple-year contracts that include option and award years, there
        is
        no certainty that budget changes in Congress or the DoD will not seriously
        affect us.  In addition, there is no certainty that the U.S. Government
        will exercise each option or award year available on a contract.
 
 SYS
        may,
        depending on the contract, perform as a prime contractor or as a subcontractor
        to another prime contractor. In cases where we perform as a subcontractor,
        we
        may be subject to price modifications required by the prime contractor. Such
        price modifications, if not mitigated by a corresponding reduction of costs,
        could have a negative impact on our profitability.
 
  **Most
        of our customers are government agencies subject to unique political and
        budgetary constraints and have special contracting requirements that may
        affect
        our ability to obtain new government customers.**
  Most
        of
        our customers are government agencies, principally DoD agencies. These agencies
        often do not set their own budgets and therefore have little control over
        the
        amount of money they can spend. In addition, these agencies experience political
        pressure that may dictate the manner in which they spend money. Due to political
        and budgetary processes and other scheduling delays that frequently occur
        in the
        contract or bidding process, some government agency orders may be canceled
        or
        substantially delayed, and the receipt of revenues or payments may be
        substantially delayed.
  In
        addition, future sales to government agencies will depend on our ability
        to meet
        government contracting requirements, certain of which may be onerous or
        impossible to meet, resulting in our inability to obtain particular contracts.
        Common requirements in government contracts include bonding, provisions
        permitting the purchasing agency to modify or terminate at will the contract
        without penalty and provisions permitting the agency to perform investigations
        or audits of our business practices.
  The
        U.S.
        Government has a program that encourages and sometimes requires large prime
        contractors to use small businesses.  The U.S. Government restricts
        the
        competition on some contracts to only qualifying small businesses. 
        Some of
        our contracts and subcontracts have been awarded based on our eligibility
        as a
        small business.  The definition of a small business changes depending
        on
        the type of product or service provided.  The U.S. Government uses
        the
        North American Industry Classification System (NAICS) codes to classify the
        small business size standards for all industries.  One of our primary
        NAICS
        codes is for engineering services, and beginning in fiscal year 2005, we
        will no
        longer qualify as a small business using this code.  We still qualify
        as a
        small business using several other NAICS codes.  In addition, the
        small
        business contracts currently held by SYS do not expire as a result of our
        no
        longer qualifying as a small business under any specific NAICS Code.  
        Some of these contracts have option years, which are not affected by this
        change
        in small business status. While our revenues to date include revenues based
        on
        our qualifying as a small business pursuant to U.S. Government regulations
        under
        which it is no longer eligible as a small business; we believe the majority
        of
        these revenues will be able to be moved to other contracts and, therefore,
        will
        not be material to our financial condition or results of operations. 
        Our
        future revenues may be impacted by not qualifying as a small business under
        certain NAICS codes.
 
 **Any
        inability to adequately retain or protect our employees, customer relationships
        and proprietary technology could harm our ability to
        compete.**
 
 Our
        future success and ability to compete depends in part upon our employees
        and
        customer relationships and proprietary technology and trademarks, which we
        attempt to protect with a combination of patent, copyright, trademark and
        trade
        secret claims, as well as with our confidentiality procedures and contractual
        provisions. These legal protections afford only limited protection and are
        time-consuming and expensive to obtain and/or maintain. Further, despite
        our
        efforts, we may be unable to prevent third parties from soliciting our employees
        or customers or infringing upon or misappropriating our intellectual
        property.  Our employees, customer relationships and intellectual
        property
        may not be adequate to provide us with a competitive advantage or to prevent
        competitors from entering the markets for our products and services.
        Additionally, our competitors could independently develop non-infringing
        technologies that are competitive with, and equivalent or superior to, our
        technology. Monitoring infringement and/or misappropriation of intellectual
        property can be difficult, and there is no guarantee that we would detect
        any
        infringement or misappropriation of our proprietary rights. Even if we were
        to
        detect infringement or misappropriation of our proprietary rights, litigation
        to
        enforce these rights would be costly and would cause us to divert financial
        and
        other resources away from our business operations.
 
 **The
        departure of certain key personnel could harm the financial condition of
        SYS.**
 
 Certain
        key employees, such as Clifton L. Cooke, Jr., Edward M. Lake, and Kenneth
        D.
        Regan, are intimately involved in our business and have day-to-day relationships
        with critical customers. Competition for highly skilled business, product
        development, technical and other personnel is intense, and there can be no
        assurance that we will be successful in recruiting new personnel or in retaining
        our existing personnel. A failure on our part to retain the services of these
        key personnel could have a material adverse effect on our operating results
        and
        financial condition. We do not maintain key man life insurance on any of
        our
        employees.
 
 **We
        face numerous competitors.**
 
 We
        have
        many competitors with comparable characteristics and capabilities that compete
        for the same group of customers. Our competitors are competent and experienced
        and are continuously working to take projects away from us. Many of our
        competitors have greater financial, technical, marketing and other resources
        than we do. Our ability to compete effectively may be adversely affected
        by the
        ability of these competitors to devote greater resources to the sales and
        marketing of their products and services than are available to
        us.
 
 **We
        must comply with numerous U.S. Government regulations.**
  SYS
        could
        become liable for penalties under various procurement rules and
        regulations.  Changes in government regulations could harm our operating
        results.  Our business must comply with and is affected by various
        government regulations.  Among the most significant regulations
        are:
 
 ·
              the
                  Federal Acquisition Regulations, and agency regulations supplemental
                  to
                  the Federal Acquisition Regulations, which comprehensively regulate
                  the
                  formation, administration and performance of government
                  contracts;
 
 ·
              the
                  Truth in Negotiations Act, which requires certification and disclosure
                  of
                  all cost and pricing data in connection with contract negotiations;
 
 ·
              government
                  accounting regulations, which impose accounting requirements that
                  govern
                  our right to reimbursement under certain cost-based government
                  contracts;
                  and
 
 ·
              laws,
                  regulations and executive orders restricting the use and dissemination
                  of
                  information classified for national security purposes and the exportation
                  of certain products and technical data.
  **Accuracy
        of indirect billing rates is critical.**
  Our
        indirect billing rates are approved at least annually by the Defense Contract
        Management Agency (DCMA) after being reviewed by the Defense Contract Audit
        Agency (DCAA).  These rates can differ from our actual indirect
        rates.  We budget to have our actual indirect rates as close as possible
        to
        our government approved indirect rates at fiscal year end.  Throughout
        the
        year, management assesses how these rates compare to forecasted rates for
        the
        year.  If a significant variance is anticipated, provisions for such
        variance are recognized at that time.  However, if the actual indirect
        rates at year-end are materially different from the government approved indirect
        rates, we would have to recognize that difference at year-end, which could
        affect our results of operations.
 
 **We
        rely on subcontractors.**
 
 We
        regularly employ subcontractors to assist us in satisfying our contractual
        obligations. If these subcontractors fail to perform their contractual
        obligations adequately, our prime contract performance and our ability to
        obtain
        future business could be materially and adversely impacted.
 
 Our
        performance of government contracts may involve the issuance of subcontracts
        to
        other companies upon which we rely to perform all or a portion of the work
        we
        are obligated to deliver to our customers.  There is a risk that we
        may
        have disputes with subcontractors concerning a number of issues, including
        the
        quality and timeliness of work performed by the subcontractor, customer concerns
        about the subcontractor, our decision not to extend task orders or issue
        new
        task orders under a subcontract, or our hiring of former personnel of a
        subcontractor.  A failure by one or more of our subcontractors to
        satisfactorily deliver agreed-upon services on a timely basis could materially
        and adversely impact our ability to perform our obligations as a prime
        contractor.  In extreme cases, such subcontractor performance deficiencies
        could result in the government terminating our contract for default. 
        A
        default termination could expose us to liability for excess costs of procurement
        by the government and have a material adverse effect on our ability to compete
        for future contracts and task orders.
 
 **Security
        clearances are necessary.**
  If
        SYS
        cannot obtain the necessary security clearances, we may not be able to perform
        classified work for the government and our revenues may suffer.  Certain
        government contracts require our facilities and some of our employees to
        maintain security clearances.  If we lose or are unable to obtain
        security
        clearances required for a particular contract, the client can terminate the
        contract or decide not to renew it upon its expiration.  As a result,
        to
        the extent we cannot obtain the required security clearances for our employees
        working on a contract, we may not derive the revenue anticipated from that
        contract. Any such reduction in revenue, if not replaced with revenue from
        other
        contracts, could seriously harm our operating results.
  Security
        breaches in sensitive government systems could result in the loss of clients
        and
        negative publicity.  Many of the systems we develop involve managing
        and
        protecting information involved in national security and other sensitive
        government functions.  A security breach in one of these systems could
        cause serious harm to our business, could result in negative publicity and
        could
        prevent us from having further access to such critically sensitive systems
        or
        other similarly sensitive areas for other government clients.
 
  **There
        are risks associated with our planned growth.**
  We
        plan
        to grow our revenues and profits by adding to our existing customer base
        through
        internal growth and by the acquisition of other government services and
        government or commercial technology related companies.  Over the past
        five
        years we have hired senior management personnel capable of establishing new
        business units within SYS.  Rapid expansion through internal growth
        has
        required additional capital resources.  We plan to continue this approach
        to building our government services business.  There can be no assurance
        that this approach will result in increased profitability in the
        future.
  Management
        believes that we can grow through the acquisition of other government services
        companies and government or commercial technology related companies that
        have
        product offerings which may be sold to both commercial and government
        customers.  The acquisition of other companies and growing those businesses
        is uncertain and contains a variety of business risks,
        including: integration, cultural differences, the retention of key
        personnel, competition, protection of intellectual property, profitability,
        industry changes and others.  Although we do not have an agreement
        to
        acquire any specific company at this time, we intend to attempt to expand
        our
        operations through the acquisition of other companies. Acquisitions and
        attempted acquisitions may place a strain on our limited personnel, financial
        and other resources. Our ability to manage this growth, should it occur,
        will
        require expansion of our capabilities and personnel.  We may not be
        able to
        find qualified personnel to fill additional positions or be able to successfully
        manage a larger organization. Further, we intend to finance these transactions
        through a combination of cash, equity and debt. Using our stock as a currency
        may have limitations as the trading volume in our stock has been limited,
        our
        stock price has been volatile, and our stock may not maintain a price sufficient
        to support transactions without being excessively dilutive.
  **We
        have very limited assets upon which to rely for adjusting to business variations
        and for growing new businesses.**
  While
        we
        are likely to look for new funding to assist in the acquisition of other
        profitable businesses, it is uncertain whether such funds will be available.
        Our
        substantial reliance on our revolving line of credit facility with Comerica
        Bank
        - California imposes certain limitations on us. If we are to grow and expand
        our
        operations, we will need to raise significant amounts of additional capital.
        There can be no assurance that we will be successful in raising a sufficient
        amount of additional capital, or if we are successful, that we will be able
        to
        raise capital on reasonable terms. If we do raise additional capital, our
        existing shareholders may incur substantial and immediate dilution.
  **There
        are a large number of shares that may be available for future sale, and the
        sale
        of these shares may depress the market price of our common
        stock.**
  As
        of
        September 30, 2005, we had issued 11,154,689 shares of common stock. Up to
        2,498,100 shares of common stock were issuable upon exercise of employee
        stock
        options at prices ranging from $1.00 to $4.10 per share, 631,250 shares were
        issuable upon the conversion of convertible notes from a private placement
        in
        2002 at $1.00 per share, 721,591 shares were issuable upon the conversion
        of
        convertible notes from a private placement in 2004 at $2.20 per share, 295,159
        shares were issuable upon the conversion of convertible notes from the
        acquisition of Polexis at $2.32 per share, 78,400 shares were issuable upon
        the
        conversion of the convertible note payable from the Antin acquisition at
        $2.50
        per share, 326,166 shares were issuable upon the exercise of warrants issued
        in
        connection with a private placement of securities completed in 2005 exercisable
        at $2.50 per share, 50,000 shares were issuable upon the exercise of warrants
        issued in connection with the acquisition of the Lomasoft technology exercisable
        at $3.87 per share, and between 200,000 and 250,000 shares were issuable
        upon
        the exercise of a stock purchase agreement issued to employee at a price
        equal
        to 90% of the average closing price.  The sale of shares issued upon
        any
        conversion of our outstanding convertible notes or the exercise of outstanding
        options, warrants or the stock purchase agreement could adversely affect
        the
        market price of our common stock.
  **There
        is a limited market for our common stock.**
  Our
        common stock is traded on the American Stock Exchange.  Trading in
        our
        common stock has been sporadic, and at present, there is a limited market
        for
        the stock. There can be no assurance that a stronger market will develop.
        Even
        if such a market does develop, it may not be sustained.  There are
        no
        analysts currently covering the Company.
  **Future
        sales of our common stock by existing shareholders under Rule 144 could decrease
        the trading price of our common stock.**
  As
        of
        September 30, 2005, a total of 4,705,282 shares of our outstanding common
        stock
        were restricted securities and could be sold in the public markets only in
        compliance with Rule 144 adopted under the Securities Act of 1933 or other
        applicable exemptions from registration. Rule 144 provides that a person
        holding
        restricted securities for a period of one year may thereafter sell, in brokerage
        transactions, an amount not exceeding in any three-month period the greater
        of
        either (i) 1% of the issuer’s outstanding common stock or (ii) the average
        weekly trading volume in the securities during a period of four calendar
        weeks
        immediately preceding the sale. Persons who are not affiliated with the issuer
        and who have held their restricted securities for at least two years are
        not
        subject to the volume limitation. Possible or actual sales of our common
        stock
        by present shareholders under Rule 144 could have a depressive effect on
        the
        price of our common stock.
  **Our
        directors, executive officers and affiliated persons beneficially own
        approximately 35% of our stock, including stock options and warrants exercisable
        within 60 days of September 30, 2005; their interests could conflict with
        yours;
        significant sales of stock held by them could have a negative effect on our
        stock price; shareholders may be unable to exercise
        control.**
 
 As
        of
        September 30, 2005, our directors, executive officers and affiliated persons
        were the beneficial owners of approximately 35.0% of our common stock, including
        stock options exercisable within 60 days of September 30, 2005. As a result,
        our
        executive officers, directors and affiliated persons will have a significant
        ability to:
 
 •
        elect
        or defeat the election of our directors;
 •
        amend
        or prevent amendment of our articles of incorporation or bylaws;
 •
        effect
        or prevent a merger, sale of assets or other corporate transaction;
        and
 •
        control
        the outcome of any other matter submitted to the shareholders for
        vote.
 
 As
        a
        result of their ownership and positions, our directors and executive officers,
        collectively, are able to significantly influence all matters requiring
        shareholder approval, including the election of directors and approval of
        significant corporate transactions. In addition, sales of significant amounts
        of
        shares held by our directors and executive officers, or the prospect of these
        sales, could adversely affect the market price of our common stock. Management’s
        stock ownership may discourage a potential acquirer from making a
        tender
        offer or otherwise attempting to obtain control of us, which in turn could
        reduce our stock price or prevent our shareholders from realizing a premium
        over
        our stock price.
 
 **ITEM
        3. Quantitative and Qualitative Disclosures about Market
        Risk**
 
 Our
        exposure to market risk for changes in interest rates relates primarily to
        our
        investment income and interest expense. As of September 30, 2005 our cash
        was
        primarily invested in a money market interest bearing account. A hypothetical
        10% adverse change in the average interest rate on our money market cash
        investments would have had no material effect on net income for the quarter
        ended September 30, 2005. We currently do not utilize any derivative financial
        instruments to hedge interest rate risks.
 
 The
        following table presents scheduled principal payments and related weighted
        average interest rates of the Company’s long-term fixed rate debt for the fiscal
        years ended June 30:
 
 2006
              
              
              2007
              
              
              Total
              
              
              Fair
                  Value (1
              )Fixed
                  rate debt
              
              $
              631,000
              
              $
              2,468,000
              
              $
              3,099,000
              
              $
              3,099,000Weighted
                  average interest rate
              
              
              10.0
              %
              
              10.0
              %
              
              10.0
              %
              
              10.0
              %
 
 The
        Company’s $4,000,000 line of credit facility bears interest on outstanding
        balances at the bank’s prime rate plus .25%. The Company did not incur any
        interest on this credit facility in the three months ended September 30,
        2005
        and the interest for the year ended June 30, 2005 was $29,000. Based on the
        Company’s recent history of borrowings under this credit facility, if there was
        a hypothetical 10% adverse change in the average interest rate, the additional
        interest expense would not have had a material effect on net income for the
        quarter ended September 30, 2005.
 
 (1)
        The
        fair value of fixed-rate debt was estimated based on the current rates offered
        for fixed-rate debt with similar risks and maturities.
 
 
 **ITEM
        4. Controls and Procedures**
 
 **Disclosure
        Controls and Procedures**
 
 As
        required by Exchange Act Rule 13a−15(b), as of September 30, 2005, we carried
        out an evaluation, under the supervision and with the participation of our
        management, including our Chief Executive Officer and our Chief Financial
        Officer, of the effectiveness of the design and operation of our disclosure
        controls and procedures as defined in Rule 13a−15(e). Based upon that
        evaluation, our Chief Executive Officer along with our Chief Financial Officer,
        concluded that our disclosure controls and procedures are
        effective.
 
 We
        intend
        to review and evaluate the design and effectiveness of our disclosure controls
        and procedures on an ongoing basis and to correct any material deficiencies
        that
        we may discover. Our goal is to ensure that our senior management has timely
        access to material information that could affect our business.
 
 **Changes
        in Internal Control over Financial Reporting**
 
 There
        has
        been no change in our internal control over financial reporting during our
        most
        recent fiscal quarter that has materially affected, or is reasonably likely
        to
        materially affect, our internal control over financial reporting.
 
  
  
 **PART
        II - OTHER INFORMATION**
 
 **Item
        1** **.** **Legal Proceedings**
 
 NONE
  **Item
        2.** **Unregistered
        Sales Of Equity Securities And Use Of Proceeds.**
 
 On
        September 27, 2005 warrants to purchase 50,000 shares of the SYS common stock
        at
        a volume weighted average price of $3.87 were issued in conjunction with
        the
        acquisition of technology and intellectual property rights from Lomasoft
        Corporation. The warrants expire in five years and contain piggy-back
        registration rights. The Company is obligated to use its best efforts to
        register these shares within one year of the purchase date.
 
 On
        September 12, 2005, SYS’s Board of Directors approved the issuance of an
        additional 25,130 shares of the Company’s common stock to be issued to the Antin
        Engineering, Inc. (Antin) stockholders as a result of a modification to a
        working capital purchase price adjustment provided for in the purchase
        agreement. One-half of the shares were issued directly to the Antin stockholders
        and the balance were placed in escrow which are contingently issuable to
        the
        stockholders based upon the future operating performance of Antin through
        June 30, 2006. The
        12,565 shares issued directly to the Antin shareholders were valued at $4.10
        per
        share or $51,517.
 
 As
        a
        result of a determination during the quarter ended September 30, 2005 that
        certain milestones had been met as of June 30, 2005, Xsilogy, Inc. is to
        be
        issued 80,000 shares of SYS stock at a value of $376,000, which has been
        included in common stock issued at September 30, 2005.
  **Item
        3****.****Defaults
        Upon Senior Securities**
 
 NONE
  **Item
        4** **.** **Submission of Matters to a Vote of Securities Holders**
 
 NONE
  **Item
        5** **.** **Other Information**
 
 NONE
  **Item
        6** **.** **Exhibits**
 
 2.1
                
                Certificate
                    of Ownership filed with the California Secretary of State on
                    November 28, 1979, filed as Exhibit 2.1 to the Company’s report on
                    Form 10-K for the fiscal year ended June 30, 1979, and
                    incorporated
                    by this reference.2.2
                
                Certificate
                    of Ownership filed with the California Secretary of State on
                    March 18, 1985, incident to change of name of the Company,
                    filed as
                    Exhibit 3.6 to this Company’s report on Form 10-K for the fiscal year
                    ended June 30, 1985, and incorporated by this
                    reference.2.3
                
                Testmasters,
                    Inc. Stock Purchase Agreement, filed as Exhibit 2.1 to this Company’s
                    Registration Statement on Form SB-2 dated May 24, 2002, and incorporated
                    by this reference.2.4
                
                Polexis
                    merger agreement, filed as Exhibit 2.2 to this Company’s Registration
                    Statement on Form SB-2 dated April 19, 2004, and incorporated
                    by this
                    reference.2.5
                
                Asset
                    purchase and sale agreement effective as of December 15,
                    2004, by and
                    between SYS and Xsilogy, Inc filed as Exhibit 2.5 to this Company’s report
                    on Form 10-QSB dated February 7, 2005, and incorporated
                    by this
                    reference.2.6
                
                Agreement
                    and plan of merger effective as of January 3, 2005 among
                    SYS, Shadow
                    I, Inc., a wholly-owned subsidiary of SYS, Antin Engineering,
                    Inc., and
                    the stockholders of Antin Engineering, Inc. filed as Exhibit
                    2.6 to this
                    Company’s report on Form 10-QSB dated February 7, 2005, and
                    incorporated by this reference.3(i)
                
                Articles
                    of Incorporation for SYS, as amended, filed as Exhibit 3.1 to
                    the
                    Company’s Registration Statement on Form SB-2, filed May 24, 2002, and
                    incorporated by this reference.3(ii)
                
                Bylaws
                    of SYS filed as Exhibit 3.2 to the Company’s Registration Statement on
                    Form SB-2, filed May 24, 2002, and incorporated by this
                    reference.4.1
                
                Certificate
                    of Determination of Preferences of Preferred Shares of Systems
                    Associates,
                    Inc., filed by the Company with the California Secretary of State
                    on
                    July 28, 1968, filed as Exhibit 3.2 to the Company’s report on Form
                    10-K for the fiscal year ended June 30, 1981, and incorporated
                    by
                    this reference.4.2
                
                Certificate
                    of Determination of Preferences of Preference Shares of Systems
                    Associates, Inc., filed by the Company with the California Secretary
                    of
                    State on December 27, 1968, filed as Exhibit 3.3 to the
                    Company’s
                    report on Form 10-K for the fiscal year ended June 30,
                    1981, and
                    incorporated by this reference.4.3
                
                Certificate
                    of Determination of Series B 9% Cumulative Convertible Callable
                    Non-Voting
                    Preference Stock was filed by the Company with the California
                    Secretary of
                    State on August 15, 1996, and included in Exhibit
                    3(i).4.4
                
                Form
                    of Subscription Agreement from the November 2001 Offering,
                    filed as
                    Exhibit 4.1 to this Company’s Registration Statement on Form SB-2 dated
                    May 24, 2002.4.5
                
                Form
                    of Convertible Note from the November 2001 Offering, filed
                    as Exhibit
                    4.2 to this Company’s Registration Statement on Form SB-2 dated May 24,
                    2002.4.6
                
                Form
                    of Subscription Agreement from the December 2003 Offering
                    (Convertible Note from December 2003 Offering included),
                    filed as
                    Exhibit 4.3 to this Company’s Registration Statement on Form SB-2 dated
                    April 19, 2004.4.7
                
                Securities
                    Purchase Agreement, dated as of May 27, 2005, by and among SYS
                    and the
                    investor parties as identified on the signature pages thereto,
                    filed as
                    exhibit 10.1 to Form 8-K filed on June 3, 2005 and incorporated
                    by this
                    reference.4.8
                
                Registration
                    Rights Agreement, dated as of May 27, 2005, by and among SYS
                    and the
                    investor parties as identified on the signature pages thereto,
                    filed as
                    exhibit 10.1 to Form 8-K filed on June 3, 2005 and incorporated
                    by this
                    reference.4.9
                
                Form
                    of Warrant to be issued by SYS to the investors in connection
                    with the
                    Securities Purchase Agreement from May 2005 Offering, filed as
                    exhibit
                    10.1 to Form 8-K filed on June 3, 2005 and incorporated by this
                    reference.10.1
                
                SYS
                    1997 Incentive Stock Option and Restricted Stock Plan filed as
                    Attachment
                    1 to the Company’s Proxy Statement filed on February 21, 1997, and
                    incorporated by this reference.10.2
                
                SYS
                    2003 Stock Option Plan filed as Exhibit 10.2 to the Company’s report on
                    Form S-8 filed on April 8, 2003, and incorporated by this
                    reference.10.3
                
                SYS
                    2003 Employee Stock Purchase Plan filed as Exhibit 10.3 to the
                    Company’s
                    report on Form S-8 filed on April 8, 2003, and incorporated
                    by this
                    reference.10.4
                
                Employment
                    contract for Clifton L. Cooke, Jr., the Company’s Chief Executive Officer
                    filed as Exhibit 10.4 to the Company’s report on Form 10-KSB for the
                    fiscal year ended June 30, 2004, and incorporated by this
                    reference.10.5
                
                Employment
                    contract for Edward M. Lake, the Company’s Chief Financial Officer and
                    Executive Vice President of Financial Operations filed as Exhibit
                    10.5 to
                    the Company’s report on Form 10-KSB for the fiscal year ended
                    June 30, 2004, and incorporated by this reference.10.6
                
                Employment
                    contract for Michael W. Fink, the Company’s Secretary and Sr. Vice
                    president of Finance and Contracts filed as Exhibit 10.6 to the
                    Company’s
                    report on Form 10-KSB for the fiscal year ended June 30,
                    2004, and
                    incorporated by this reference.10.7
                
                Employment
                    contract for Robert A. Babbush, the Company’s Assistant Secretary and Sr.
                    Vice President of Administration filed as Exhibit 10.7 to the
                    Company’s
                    report on Form 10-KSB for the fiscal year ended June 30,
                    2004, and
                    incorporated by this reference.10.8
                
                Employment
                    contract for Colin Hirayama, the Company’s Sr. Vice President of
                    Technology Assessment filed as Exhibit 10.8 to the Company’s report on
                    Form 10-KSB for the fiscal year ended June 30, 2004, and
                    incorporated
                    by this reference.10.9
                
                Employment
                    contract for Robert Holmes, the Company’s Defense Solutions Group’s Sr.
                    Vice President of Defense Operations filed as Exhibit 10.9 to
                    the
                    Company’s report on Form 10-KSB for the fiscal year ended June 30,
                    2004, and incorporated by this
                    reference.
  
 10.10
                
                Employment
                    contract for Kenneth D. Regan, the Company’s Defense Solutions Group’s
                    President and Chief Operating Officer filed as Exhibit 10.10
                    to the
                    Company’s report on Form 10-KSB for the fiscal year ended June 30,
                    2004, and incorporated by this reference.10.11
                
                Employment
                    contract for Linda E. Gagnon, the Company’s Defense Solutions Group’s
                    Division Sr. Vice President, Engineering and Management Solutions
                    filed as
                    Exhibit 10.11 to the Company’s report on Form 10-KSB for the fiscal year
                    ended June 30, 2004, and incorporated by this
                    reference.10.12
                
                Restricted
                    stock purchase agreement between SYS and Ben Goodwin dated August
                    16,
                    2005, filed as exhibit 99.1 to Form 8-K filed August 18,
                    2005.31.1
                
                Certification
                    of Chief Executive Officer pursuant to Section 302 of
                    the
                    Sarbanes-Oxley Act of 2002.31.2
                
                Certification
                    of Chief Financial Officer pursuant to Section 302 of
                    the
                    Sarbanes-Oxley Act of 2002.32.1
                
                Certification
                    of Chief Executive Officer pursuant to Section 906 of
                    the
                    Sarbanes-Oxley Act of 2002.32.2
                
                Certification
                    of Chief Financial Officer pursuant to Section 906 of
                    the
                    Sarbanes-Oxley Act of 2002.
 
  
  **SIGNATURES**
  In
        accordance with the requirements of the Exchange Act, the registrant caused
        this
        report to be signed on its behalf by the undersigned, thereunto duly
        authorized.
  SYS(Registrant)Date:
              November
                  14, 2005
              
              /s/
                  Clifton L. Cooke, Jr.Clifton
                  L. Cooke, Jr.Chief
                  Executive OfficerDate:
              November
                  14, 2005
              
              /s/
                  Edward M. LakeEdward
                  M. LakeChief
                  Financial Officer
 
 
 **Exhibit
        31.1**
  **CERTIFICATION
        OF CHIEF EXECUTIVE OFFICER**
  I,
        Clifton L. Cooke, Jr., certify that:
  1.
        I have
        reviewed this quarterly report on Form 10-Q of SYS;
  2.
        Based
        on my knowledge, this report does not contain any untrue statement of a material
        fact or omit to state a material fact necessary to make the statements made,
        in
        light of the circumstances under which such statements were made, not misleading
        with respect to the period covered by this report;
 
 3.
        Based
        on my knowledge, the financial statements, and other financial information
        included in this report, fairly present in all material respects the financial
        condition, results of operations and cash flows of the registrant as of,
        and
        for, the periods presented in this report.
  4.
        The
        registrant’s other certifying officer(s) and I are responsible for establishing
        and maintaining disclosure controls and procedures (as defined in Exchange
        Act
        Rules 13a-15(e) and 15d-15(e)) for the registrant and have:
  a)
        Designed such disclosure controls and procedures, or caused such disclosure
        controls and procedures to be designed under our supervision, to ensure that
        material information relating to the registrant, including its consolidated
        subsidiaries, is made known to us by others within those entities, particularly
        during the period in which this report is being prepared; and
  b)
        Evaluated the effectiveness of the registrant’s disclosure controls and
        procedures and presented in this report our conclusions about the effectiveness
        of the disclosure controls and procedures, as of the end of the period covered
        by this report based on such evaluation; and
  c) 
        Disclosed in this report any change in the registrant’s internal control over
        financial reporting that occurred during the registrant’s most recent fiscal
        quarter (the registrant’s fourth fiscal quarter in the case of an annual report)
        that has materially affected, or is reasonably likely to materially affect,
        the
        registrant’s internal control over financial reporting; and
  5.
        The
        registrant’s other certifying officer(s) and I have disclosed, based on our most
        recent evaluation of internal control over financial reporting, to the
        registrant’s auditors and the audit committee of registrant’s board of directors
        (or persons performing the equivalent functions):
  a) 
        All significant deficiencies and material weaknesses in the design or operation
        of internal control over financial reporting which are reasonably likely
        to
        adversely affect the registrant’s ability to record, process, summarize and
        report financial information; and
  b) 
        Any fraud, whether or not material, that involves management or other employees
        who have a significant role in the registrant’s internal control over financial
        reporting.
  Dated:
                  November 14, 2005
              
              By:
              /s/
                  Clifton L. Cooke, Jr.Clifton
                  L. Cooke, Jr.Chief
                  Executive Officer
 
 **Exhibit
        31.2**
  **CERTIFICATION
        OF CHIEF FINANCIAL OFFICER**
  I,
        Edward
        M. Lake, certify that:
  1.
        I have
        reviewed this quarterly report on Form 10-Q of SYS;
  2.
        Based
        on my knowledge, this report does not contain any untrue statement of a material
        fact or omit to state a material fact necessary to make the statements made,
        in
        light of the circumstances under which such statements were made, not misleading
        with respect to the period covered by this report;
  3.
        Based
        on my knowledge, the financial statements, and other financial information
        included in this report, fairly present in all material respects the financial
        condition, results of operations and cash flows of the registrant as of,
        and
        for, the periods presented in this report.
  4.
        The
        registrant’s other certifying officer(s) and I are responsible for establishing
        and maintaining disclosure controls and procedures (as defined in Exchange
        Act
        Rules 13a-15(e) and 15d-15(e)) for the registrant and have:
  a)
        Designed such disclosure controls and procedures, or caused such disclosure
        controls and procedures to be designed under our supervision, to ensure that
        material information relating to the registrant, including its consolidated
        subsidiaries, is made known to us by others within those entities, particularly
        during the period in which this report is being prepared; and
  b)
        Evaluated the effectiveness of the registrant’s disclosure controls and
        procedures and presented in this report our conclusions about the effectiveness
        of the disclosure controls and procedures, as of the end of the period covered
        by this report based on such evaluation; and
  c)
        Disclosed in this report any change in the registrant’s internal control over
        financial reporting that occurred during the registrant’s most recent fiscal
        quarter (the registrant’s fourth fiscal quarter in the case of an annual report)
        that has materially affected, or is reasonably likely to materially affect,
        the
        registrant’s internal control over financial reporting; and
  5.
        The
        registrant’s other certifying officer(s) and I have disclosed, based on our most
        recent evaluation of internal control over financial reporting, to the
        registrant’s auditors and the audit committee of registrant’s board of directors
        (or persons performing the equivalent functions):
  a)
        All
        significant deficiencies and material weaknesses in the design or operation
        of
        internal control over financial reporting which are reasonably likely to
        adversely affect the registrant’s ability to record, process, summarize and
        report financial information; and
  b)
        Any
        fraud, whether or not material, that involves management or other employees
        who
        have a significant role in the registrant’s internal control over financial
        reporting.
  Dated:
                  November 14, 2005
              
              By:
              /s/
                  Edward M. LakeEdward
                  M. LakeChief
                  Financial Officer
  
 
 **Exhibit
        32.1**
  **CERTIFICATION
        OF CHIEF EXECUTIVE OFFICER**
  I,
        Clifton L. Cooke, Jr., Chief Executive Officer of SYS (the Registrant), do
        hereby certify pursuant to Rule 15d-14(b) of the Securities and Exchange
        Act of
        1934, as amended, and Section 1350 of Chapter 63 of Title 18 of the
        United
        States Code that:
  (1)
        the
        Registrant’s Quarterly Report on Form 10-Q of the Registrant for the quarter
        ended September 30, 2005 (the Report), to which this statement is filed as
        an
        exhibit, fully complies with the requirements of Section 13(a) or
        15(d) of
        the Securities Exchange Act of 1934, as amended; and
  (2)
        the
        information contained in the Report fairly presents, in all material respects,
        the financial condition and results of operations of the
        Registrant.
  Dated:
                  November 14, 2005
              
              By:
              /s/
                  Clifton L. Cooke, Jr.Clifton
                  L. Cooke, Jr.Chief
                  Executive Officer
 
 
  
 **Exhibit
        32.2**
  **CERTIFICATION
        OF CHIEF FINANCIAL OFFICER**
  I,
        Edward
        M. Lake, Chief Financial Officer of SYS (the Registrant), do hereby certify
        pursuant to Rule 15d-14(b) of the Securities and Exchange Act of 1934, as
        amended, and Section 1350 of Chapter 63 of Title 18 of the United States
        Code
        that:
  (1)
        the
        Registrant’s Quarterly Report on Form 10-Q of the Registrant for the quarter
        ended September 30, 2005 (the Report), to which this statement is filed as
        an
        exhibit, fully complies with the requirements of Section 13(a) or 15(d) of
        the
        Securities Exchange Act of 1934, as amended; and
  (2)
        the
        information contained in the Report fairly presents, in all material respects,
        the financial condition and results of operations of the
        Registrant.
  Dated:
                  November 14, 2005
              
              By:
              /s/
                  Edward M. LakeEdward
                  M. LakeChief
                  Financial Officer